It is a great pleasure and privilege to be in Madrid for this conference hosted by the Bank of Spain and the Financial Stability Institute. I would like to present a few remarks on procyclicality, what it means, what role it played in the current crisis and which policy options are available to mitigate its amplitude and impact on financial systems. What is procyclicality? Strictly speaking, procyclicality refers to the tendency of financial variables to fluctuate around a trend during the economic cycle. Increased procyclicality thus simply means fluctuations with broader amplitude. Such a simple description seldom fits the behaviour of financial systems in real life. More likely, following a shock, the path of asset prices and evolution of financial aggregates will display various and highly irregular forms of volatility, with possible non linearities and discontinuities (a good example being liquidity freezes). These are characteristic features of complex systems. "Once such a system is destabilized, it moves away from the linear regime and experience non linear behaviour such as path dependance … sustained oscillations … and regime shifts " 1
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