Monetary policy limitations: Black Swan Events

Question 1

What is a Black Swan Event in the context of monetary policy?

Answer 1

A Black Swan Event is an extreme, unprecedented, and unexpected risk event that can severely disrupt markets and economies. Examples include the 2007 US subprime mortgage crisis and the 2020 COVID-19 pandemic.

Question 2

According to an RBI report, what could be a potential Black Swan Event for India? How could it create problems?

Answer 2

A potential Black Swan Event could be the sudden withdrawal of $100 billion by Foreign Portfolio Investors (FPI) from the Indian market. This could lead to a significant drop in liquidity, a sharp decline in the value of the rupee, and potential instability in the financial system.

Question 3

Who developed the Black Swan Theory? In which book was it introduced?

Answer 3

The Black Swan Theory was developed by author and former trader Nassim Nicholas Taleb. He introduced the concept in his book “The Black Swan: The Impact of the Highly Improbable”.

Question 4

What is the difference between a Black Swan Event and an event like “Fed tapering”?

Answer 4

A Black Swan Event is unexpected and has a severe impact. Fed tapering, the gradual reduction of the Federal Reserve’s bond-buying program, while significant, is generally anticipated by economists and markets, thus not qualifying as a Black Swan Event.