Regarding monetary policy issues, the sharp rate cuts carried out by the Fed, including two 75bp cuts, contrast at first sight with the policy stance of the ECB. Why such a difference? Does this point to a lack of reactivity on the part of the ECB during downturns? This claim, though often heard, is not supported by scientific analyses of past actions. For instance, recent simulations conducted by Prof. Larry Christiano and co-authors suggest that the ECB’s actions were indeed more effective in stabilizing output in the aftermath of the 2001 crash (Christiano, Rostagno and Motto, 2007), while different shocks and different degrees of nominal rigidities in both economies accounted for apparent different reaction functions. Looking at the present situation, I think that it is possible to reconcile both views if one takes account of the nature and extent of macroeconomic uncertainty that currently affects the US economy as compared with the euro area. Economic uncertainty facing policymakers has always been a first-order problem, but it is obviously particularly acute in periods of stress. Taking into account some non-benign  2  Recent research at the Banque de France highlights moral hazard issues associated with the choice of any of these instruments by the LLR, cf. Ewerhart and Valla (2007), when the strategic behaviour of money market participants is explicitly modelled. 2  BIS Review 37/2008  dimensions of this uncertainty may be an incentive for central bankers to implement a “riskmanagement” approach to monetary policy. This is at least the view that Fed Gov.

Christian Noyer: Conducting monetary policy in times of financial stress Speech by Mr Christian Noyer, Governor of the Bank of France, at the European Banking and Financial Forum, Prague, 1 April 2008. *  *  *  For more than two centuries, preserving the value of money and fostering the stability of payment systems and credit and financial markets have been the two main responsibilities of central banks around the world. Under normal circumstances, we tend to think of these tasks as relatively distinct. Furthermore, this practical dichotomy broadly reflects the academic state of the art: as Professor Goodhart recently stressed, the large consensus on the macroeconomic policy side of central banking that has emerged over the last two decades contrasts with the absence of consensus on the appropriate theoretical framework for analysing financial stability and the best ways of ensuring it or restoring it when it breaks down.1 However, in times of stress, some interactions inevitably emerge. For instance, the financial turmoil has a clear impact on the effectiveness of monetary policy transmission (see for example the unusually large spreads on the money markets since August 2007). Conversely, adequate monetary policy decisions and credible communication should contribute to the orderly unwinding of financial crises. Periods of turmoil, like the one we are now experiencing, are thus clearly challenging, since we have to rethink the way in which we can meet both of our responsibilities. I will first address the issue of the necessary separation of liquidity management and monetary policy decisions.