, allowing all participating central banks to obtain foreign currency in the event of a liquidity squeeze. in 2013, the ecb also established a swap agreement with the people ’ s bank of china in recognition of its growing systemic importance as well as the rapidly growing bilateral trade and investment between the euro area and china. 7 factoring in political risks so how do we factor political risks into our decision - making? i would argue that central banks cannot process political risks in the same way as economic risks, for two reasons. the first relates to the degree of uncertainty that surrounds political risks. here it is useful to recall frank knight ’ s classic distinction between risk and uncertainty. 8 risk is present when future events occur with measurable probability. uncertainty arises when the likelihood of future events is indefinite or incalculable. in conditions of uncertainty, it is not possible to manage risk in the sense of quantifying a range of outcomes. decision - making then depends on qualitative judgement. to be sure, this is sometimes the situation central banks find themselves in when surveying the economic outlook. the economy is always characterised by both risk and uncertainty, and there are certain situations – for instance, financial crises – in which models fail and uncertainty prevails. in these cases, central banks still have to take decisions and judgement is the only basis we have. yet, i would venture that economic risks are, on the whole, more quantifiable than political ones, and hence more conducive to active risk management. this is because we have workable models of the economy with broadly established parameters and regularities. and even when the parameters of those models appear to change – like the phillips curve today – they still provide us with a framework to think about those deviations and attempt to explain what we are seeing. for politics, however, we rarely have such tools. we may be able to gauge from opinion polls the likelihood of a political change of course happening. we may even be able to weigh up political parties ’ manifestos and estimate some of the economic consequences of their coming to power. but fundamentally, we know little about how consumers and firms will react to political developments, and especially to the types of seismic political change that are macroeconomically relevant. indeed, for such events to be considered a risk they are usually unprecedented. this means that if we were to engage in managing political risks ex ante, most of the time we would be operating in uncertain circumstances and making judgement calls.

benoit cœure : central banks as risk managers speech by mr benoit cœure, member of the executive board of the european central bank, at the 53rd seacen governors'conference / high - level seminar and the 37th meeting of the seacen board of governors, bangkok, 16 december 2017. * * * it is a great pleasure for me to be here today. before i comment on this panel ’ s topic, let me express my gratitude and satisfaction with the strategic partnership between the ecb and seacen, which got off to a successful start this year. many cooperation activities, ranging from seminars on macroprudential analysis to central bank governance, have already been launched and more is being planned for 2018. i look forward to strengthening our cooperation over the coming years. the topic of this panel deals with the implications of political risks for central banks. given the independence of central banks and their legal separation from the political dimension, this is obviously a complex issue – and one where monetary policymakers need to tread very carefully. for this reason, i would first like to spell out how the ecb generally incorporates different kinds of risk into its monetary policy strategy, and how this has influenced our actions over the last few years. i will argue that every central bank is to a considerable extent a risk manager, reflecting the forward - looking nature of monetary policy. i will then explain why political risks cannot be addressed in the same way as economic risks. central banks should not prejudge political outcomes through their actions. rather, they should address their effects if and when they become visible in the economic and financial data that are relevant for their price stability mandates. monetary policy and risk management my starting point is that monetary policy works with long and variable lags. in the euro area, for example, the full transmission of interest rate decisions to output has been estimated to be between one and two years, and even longer for inflation. 1 so, if we were to decide policy on the basis of past outcomes, we would always be behind the curve. monetary policymakers therefore have to look at the economy in a forward - looking way. to do this, we produce forecasts, on a regular basis, that indicate our central expectations for the economy – the baseline. in principle, this should be enough to form a view on how policy should be designed today. but we all know that this would be a bad idea. policymakers are typically poor forecasters, and central bankers are no exception. 2