New Financial Product and Challenges for Central Banks

New financial products (NFP) are often defined as the emergence of new financial instruments in more sophisticated and developed financial markets. In the development of more complete markets, the existence of new financial products can improve resource allocation, thereby supporting longer term growth prospects. In more advanced markets, the existence of new financial products appear to reduce growth volatility, allow firms to have a more flexible financial structure and households to have smoother consumption in the face of temporary changes in their income. However, financial innovations pose new challenges for central bankers as they can make monetary analysis more complex by modifying the monetary policy transmission mechanism, and in some cases even endanger financial stability. The global financial crisis has demonstrated its potential risks to the markets and poses challenges for central banks. In view of this, central banks need to track the trade mechanisms of new financial products and their roles in the financial markets. Central banks need to closely coordinate policies on new financial products and share information with the other financial authorities, based upon its understanding of trades in new financial product and their linkage effects.