On the new central bank strategy toward monetary and financial instabilities management in finances: Econophysical analysis of nonlinear dynamical financial systems

TL;DR

This paper proposes a new econophysics-based strategy for central banks to manage monetary and financial instabilities by using a nonlinear dynamic model to better understand and control complex financial systems during volatile market conditions.

Contribution

It introduces the NDSGE model integrating econophysical insights into economic analysis, offering a novel approach for central banks to manage financial instabilities.

Findings

Central banks can improve stability management using econophysical analysis.

The NDSGE model captures nonlinear interactions in financial systems.

Econophysical methods enhance understanding of market volatility.

Abstract

We describe the innovations in finances, introduced over the recent decades, and analyze most of the business and regulatory challenges, faced by the financial industry, because of the present disruptive changes in the global capital markets. We use the integrative thinking approach to formulate the new central bank strategy and propose that the new strategy has to be focused on the constant management of the monetary and financial instabilities, using the knowledge base in the field of econophysics. We propose the new theoretical model of economics, which is called the Nonlinear Dynamic Stochastic General Equilibrium (NDSGE), which takes to the account the nonlinearities, appearing during the interaction between the business cycles. We show that the central banks, which will apply the knowledge gained from the econophysical analysis to understand the complex processes in the national financial systems in the time of high volatility in global capital markets, will be able to govern the national financial systems successfully.