It also highlighted the costs of ignoring the role of macro-prudential policy in managing these risks. That is why the post-crisis policy architecture has sought to fill these gaps. New institutional means have also been found to improve the integration of these microprudential, macro-prudential, macro-economic and global perspectives. In the UK, the first three are now housed under one roof at the Bank of England. In what follows, I first set out some background on the dynamics of a complex system of systems using some stylised examples. I then discuss some stylised facts on the “system of systems” that is today’s economic and financial network. Finally, I draw out some tentative conclusions for future research and policy which follow from viewing the macro-financial system through this lens. The architecture of complexity The literature on complexity theory, and its implication for system dynamics, is now deep and rich (Newman (2011)). Although there is no generally-accepted definition of complexity, the one contained in Herbert Simon’s classic 1962 article on the Architecture of Complexity – “one made up of a large number of parts that interact in a non-simple way” – continues to capture well its everyday essence (Simon (1962)). In complex systems, the whole behaves very differently than the sum of its parts. Although there is no single unifying theory of complexity, the dynamic properties of complex systems are now reasonably well-understood, based on analytical and experimental studies of networks of all types – physical, natural, social, biological and economic (Ladyman et al (2013)).

The traditional monetary trilemma limits policy choice to only two among the three dimensions: independent monetary policy, free capital mobility and exchange rate stability. However, the usefulness of exchange rate flexibility as the shock absorber has been increasingly questioned over time. A more sceptical view on the usefulness of flexible exchange rates has changed the trilemma into an “irreconcilable duo: independent monetary policies are possible  9  Gros, Daniel. (2011) What is holding Italy back?, CEPS Commentary, 8 November 2011. 10  Hassan F., G. I. P. Ottaviano (2013), Productivity in Italy: the great unlearning, VoxEU.org, 30 November. 11  Constâncio, 2015. ibid. 12  Stanley Fischer (2010): Myths of Monetary Policy, Israel Economic Review, 2010. 4  BIS central bankers’ speeches  if and only if the capital account is managed” (Ray, 2013) 13. Those who believe that exchange rate flexibility should not be abandoned, even in the cases of small open economies, have largely deflated their expectations of flexible exchange rates to act as shock absorbers 14. Therefore, the notion that “the global financial cycle constrains national monetary policies regardless of the exchange rate regime” has now become part of common knowledge. With supranational “one-size-fits-all” monetary policy, the role of national fiscal policy in stabilizing real activity and inflation has, accordingly, increased in euro-area member states. However, the configuration of single monetary policy, coupled with national fiscal sovereignty and the no bail-out clause, has generated suboptimal policies and frictions that threaten the monetary union.