Furthermore, the extent of a country’s total financial regulatory effort encompassed by the term ‘banking supervision’ varies - most British banks have set up separate subsidiaries for their trading activity, regulated by securities regulators (though the responsibility for consolidated supervision remains with the Bank of England); by contrast, European banks tend to retain trading within the banking entity. It is also not always apparent whether the central bank is in practice free to set interest rates to achieve the monetary policy objectives which derive from its own statutes or from objectives set by government. The Bundesbank clearly has that freedom; and the other EU member states have been legislating in accordance with the Maastricht Treaty to give their central banks independence in the field of monetary policy. In Britain, even though there have been very welcome improvements in the transparency of monetary policy formulation since 1992, decisions on interest rates remain clearly with the Chancellor of the Exchequer though now within a clear inflation target framework. In Japan the position is under review. The ultimate authority on interest rates has rested legally with the Minister of Finance, though according to Goodhart, Capie and Schnadt “it is widely understood that it would be extraordinary if the government resorted to these provisions, and they have never been enacted”.2 The same authors conclude that the Bank of Japan “has thus enjoyed independence in practice”.

But this would not mean that financial conditions and indicators would become independent targets for monetary policy. Conclusions My main conclusion from the crisis with regard to monetary policy so far is that flexible inflation targeting – applied in the right way and using all the information about financial conditions that is relevant for the forecast of inflation and resource utilisation at any horizon – remains the best-practice monetary policy before, during, and after the financial crisis. But a better theoretical, empirical and operational understanding of the role of financial conditions and financial intermediation in the transmission mechanism is urgently required and needs much work, work that is already underway in academia and in central banks. Furthermore, monetary policy cannot guarantee financial stability. A separate financial-stability policy, with the objective of financial stability and with suitable instruments other than the policy rate, is required. References Adrian, Tobias, and Hyun Song Shin (2010), “Financial Intermediaries and Monetary Economics,” in Friedman, Benjamin M., and Michael Woodford (eds. ), Handbook of Monetary Economics, Volume 3, Elsevier, forthcoming. Adrian, Tobias, and Hyun Song Shin (forthcoming), “Liquidity and Leverage,” Journal of Financial Intermediation, available as Federal Reserve Bank of New York Staff Reports 328, 2007. Assenmacher-Wesche, Karin, and Stefan Gerlach (2009), “Financial Structure and the Impact of Monetary Policy on Asset Prices”, working paper, www.stefangerlach.com. Bernanke, Ben S. (2007), “Global Imbalances: Recent Developments and Prospects,” speech on 11 September 2007, www.federalreserve.gov. Bernanke, Ben S. (2010), “Monetary Policy and the Housing Bubble”, speech on 3 January, 2010, www.federalreserve.gov.