Many governments tend to smooth their economies’ growth trends by trying to lower the deviation in their economies. For example, rthe Chinese government now focuses more on stabilisation of the Chinese economy rather than the economic growth that the Chinese central government recently axes a local government’s spending on a construction building project and the regulators also push the financial sector to lower the leverage ratios. Other countries have also imposed similar policies to tackle the issue of violatility in their economies. The central banks have been playing very important roles in stabilising economies. Inflation is an important measure of the violatility in the economy. Central banks tend to control the inflation rates within a reasonable range by imposing effective monetary policies.
However, from history, black swan events are far more dangerous than observable violatility. For observable violatility, it is more likely for policy makers to impose effective policies to tackle the issue; however, for black swan events, it is impossible for policy makers to do anything before a black swan event takes place, as it is unobservable.
If we are able to find a link between the black swan events and the violatility, it will definitely help us to find an indirect possible solution to lower the likelihood of black swan events taking place in the economy. To find the relationship between black swan events and violatility can be done by observing the economic violatility when a swan event take places. However, it has several issues to make the finding less credible. Firstly, the sample size is not big enough. Secondly, it does not provide a clear direction of causality between the two variables. Thirdly, there has been enough theoretical work to support the model building.
To conclude, governments and policy makers tend to lower the violatility to smooth the economic growths; however, black swan events have been the worst source hurting our economies.
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