During the Great Moderation, forecast errors shrunk. The MPC narrowed their fan charts in response, becoming more precise in their estimates of future output and inflation. Post-crisis, that picture has changed radically. Forecast errors increased. The fan charts were widened significantly, almost doubling for both future output growth and inflation. Like psychology students of the 1950s, there was a significant degree of pre-crisis over-precision by the MPC in their assessment of the economy. 55  IMF (2013). 56  Haldane (2013). 57  Lombardelli et al (2005) for the UK and Blinder and Morgan (2007) for the US. 58  Hansen, McMahon and Velasco Rivera (2014). 59  It is too soon to assess the decision-making structures of the FPC and PRA, all of whose decisions so far have been consensual. 60  For further discussion on decision making under uncertainty, see Aikman et al (2011). 10  BIS central bankers’ speeches  Despite the post-crisis widening of the fan charts, it remains unclear whether the now higher degree of uncertainty in the fan charts is correctly calibrated. Chart 12 looks at outcomes for output growth and inflation since the crisis, relative to the MPC’s probability distribution at the one year horizon, broken down into 20% buckets. If the fan chart distribution had been roughly right, these outcomes would be equally distributed across the buckets. They are not. In practice, output and inflation have fallen systemically into the tails of the distribution, with around 50% in the outer 20% buckets.

In addition, with the cooperation of local and international authorities an early warning system should be constructed so that the fragilities in the international financial system would be identified and necessary and sufficient measures to fix them would be taken beforehand. In this context I believe that effective and efficient risk management and re-regulation will be the cornerstones of the new global financial architecture where the financial intermediation should not let the direct relationship between lender and borrower to be cut completely under various forms of effective risk diversification and securitization. Sound domestic policies for a healthy banking sector are necessary but not sufficient for addressing contemporary challenges of the global world. In this respect, improving policy coordination at the regional and international level is a must. Only then, we would be able to attain the optimal level of international financial regulatory rules and guidelines together with adequate tools that would match the complex nature of the international financial markets. With this consensus in mind, G-20 leaders at their summit in mid November, agreed upon an important set of principles on reforming the international financial architecture. We strongly support the promotion of these principles that include strengthening transparency and accountability, enhancing sound regulation, promoting integrity in financial markets, reinforcing international cooperation and reforming international financial institutions. We must lay the foundation for reform altogether to ensure that a global crisis, such as this one, does not occur again. Thank you. 2  BIS Review 153/2008