In sum, the recurrence of financial crises, the emergence of market distortions and the new challenges facing supervisors have prompted some analysts to wonder whether there would exist a dilemma between efficiency and stability. Is instability the price to be paid for the improved efficiency resulting from financial deregulation? Allow me to present now the answers I think central banks and prudential authorities could give to these questions. 3. Monetary and prudential policies should promote an environment in which financial systems are both stable and efficient  First, monetary policy should act as a stabiliser Monetary policy alone cannot guarantee the stability of financial systems, which may be jeopardised by shocks from both the financial and the real economies. However, it does have a stabilising effect. In general, the objective of price stability lowers economic agents’ uncertainty regarding future price developments. In addition, by committing itself to a long-term objective, the central bank reduces market uncertainty, which can be a source of disruption to the financial economy. Interest rates are less volatile as a result, which is of benefit to the long-term growth of the economy. To achieve this, the central bank must send clear and consistent signals to agents and markets and maintain a constant exchange of information. Financial innovation and the liberalisation of capital movements have made such communication more sensitive. Central banks must now systematically explain discrepancies between actual and projected results if they are to preserve their credibility.

Lowering the barriers to entering the financial sector, the free circulation of information and fiercer competition have also brought financial markets closer to a situation of perfect competition, which is of benefit to all consumers. Lastly, the growth of market financing has allowed savings to be channelled directly into investment. Reducing the share of bank financing, and therefore to a certain extent that of money creation, has enabled the financing of the economy to be less inflationary. Second consequence: a new framework for conducting monetary policy Financial deregulation has contributed to change the conduct of monetary policies. More open economies and greater interdependence between financial systems has completely overhauled the context in which monetary policy is implemented. •  Financial markets can now penalise inflationary monetary policies by withdrawing capital, with a subsequent rise in long-term interest rates and/or depreciation of the exchange rate. •  At the same time, the monetary policy transmission mechanisms have become more diversified and complex. This situation is one of the reasons why there has been a substantial clarification at a European and global level of the division of labour amongst economic policies. In this context, monetary policy has been clearly assigned the objective of maintaining price stability. Today, monetary policies are conducted within a framework characterised by two main features: •  Firstly, the reducing of inflation expectations depends on compliance with a number of rules that have been clearly defined in advance.