Stress-testing macro stress testing:does it live up to expectations?

by Claudio Borio, Mathias Drehmann andKostas Tsatsaronis
 
Working Papers No 369
January 2012

Abstract:

 We critically review the stateof the art in macro stress testing, assessing its strengths and weaknesses.We argue that, given current technology, macro stress tests are ill-suitedas early warning devices, ie as tools for identifying vulnerabilities duringseemingly tranquil times and for triggering remedial action. By contrast,as long as properly designed, stress tests can be quite effective as crisismanagement and resolution tools. We also see additional side benefits,stemming largely from the way such tests can discipline thinking aboutfinancial stability. We suggest possible ways to improve their performance.
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