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Introduction (partial) "In recent decades, developments in the financial sector have played a major role in shaping macroeconomic outcomes in a wide range of countries. Financial developments have reinforced the momentum of underlying economic cycles, and in some cases have led to extreme swings in economic activity and a complete breakdown in the normal linkages between savers and investors. These experiences have led to concerns that the financial system is excessively procyclical, unnecessarily amplifying swings in the real economy. In turn, these concerns have prompted calls for changes in prudential regulation, accounting standards, risk measurement practices and the conduct of monetary policy in an attempt to enhance both financial system and macroeconomic stability. In this paper, we examine these concerns and discuss possible options for policy responses. It is not our intention to formally model the complex interactions between the financial system, the macroeconomy and economic policy. Rather, we have the more modest goal of stimulating discussion on some of the key linkages between developments in the financial system and the business cycle. Our main focus is on the intrinsically difficult issues of how risk moves over the course of a business cycle and on how policymakers might respond to reduce the risk of financial instability, and attendant macroeconomic costs, that can arise from the financial system’s procyclicality."

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