For example, afire sale of assets by one bank may have a mechanical amplifying impact on other banks through its effect on market prices, but could simultaneously affect other banks via confidence and beliefs, if people become less optimistic about valuations of other assets when one asset class is in distress. 5 The role of beliefs and behaviour in affecting outcomes means that there is a premium on understanding decision-making under uncertainty. In economics, broadly speaking there are two approaches to modelling decision making under uncertainty: the standard, “rational” approach of “homo economicus” which assumes that beliefs are based on an efficient processing of all available information, and the “behavioural” approach, informed by the psychology literature, which highlights psychological traits that violate the assumptions underlying the “rational” view. The two approaches yield different conclusions on both the desirability of policy intervention and the form it should take. In practice, the applicability of each approach depends on the context. Rationality may be a reasonable approximation when decisions are carefully considered (perhaps because the returns to a “good” decision are high). But behavioural economists and psychologists contend that people often make decisions using simple or “fast and frugal” heuristics because of limited time, information, and cognitive capacity (Gigerenzer and Todd 1999). 4  For example, Caballero and Krishnamurthy (2008) show how liquidity shocks in the presence of Knightian uncertainty can cause investors to hoard liquid assets.

Madam Chairperson, with respect to its organisational and functional structure, the Bank has overtime undergone modifications to suite its role as a monetary and supervisory authority. In addition, structural changes have been necessitated by the continuously changing demands along with changes in the economy and especially in the dynamic financial markets. From a handful of departments at inception currently, the Bank comprises the following core departments, Economics, Financial Markets, Bank Supervision, Non-bank Financial Institutions Supervision, Banking, Currency and Payment Systems, and the Regional Office in Ndola. The support departments include Procurement and Maintenance, Finance, Bank Secretariat, Human Resources, Information Technology and Internal Audit as well as a Security Division. In order to streamline the operations of the Bank and improve its performance, a performance agreement system for employees was introduced in 1995. This was meant to bring about a new work culture with emphasis on professionalism, based on the philosophy, “The BoZ Way means Action”. Mr President, Ladies and Gentlemen, since the 1996 Bank of Zambia Amendment Act, the Bank has continued to enjoy operational autonomy with regard to the formulation and implementation of monetary policies and attainment of relative financial system stability. The ability of the Bank to continually meet quantitative benchmarks set by Government and cooperating partners, can be attributed to the focus of its monetary policy on creating a stable macroeconomic environment as a precondition for sustainable economic growth.