I see more advantages than drawbacks in the European approach, since I believe that to achieve good coordination between monetary and macro-prudential policies and ensure sufficient capacity and speed of response, the central bank should play an important role in the design and management of the new macro-prudential instruments and measures. The use of unconventional measures in monetary policy implementation The second change I wish to discuss regarding monetary policy management is the role of what are dubbed unconventional measures. As you will recall, central banks’ immediate reaction to the first signs of the crisis was to deploy all available conventional instruments. Firstly, faced with clogged-up interbank markets, central banks had to directly assume the task of liquidity re-distribution among banks. Also under the heading of conventional measures, most central banks aggressively cut official interest rates to prevent an abrupt and deep decline in activity from triggering a deflationary process. This policy ultimately took intervention interest rates to very low levels. Accordingly, when the worsening of the crisis made it necessary to relax the monetary policy stance even further, most central banks had to look to unconventional instruments. Unconventional measures can be grouped into three major blocks: forward guidance; measures aimed at expanding the central bank balance sheet, and changes in the composition of this balance sheet. The use of forward guidance to steer inflation expectations and interest rates has spread among the main central banks. The ECB resorted to this last summer to anchor interest rate expectations.

There is already some agreement on the need to have this new macro-prudential policy rest on two levels or dimensions. First, a cross-sectional dimension, focused on controlling the distribution of risks within the financial system at each point in time. This requires analysis of how institutions interact and what are the consequences of these interactions for the system as a whole. The aim should be to identify those interactions of most global systemic significance in order to subject them, logically, to more demanding soundness requirements. Further, macro-prudential policy should also heed the time dimension, which analyses how aggregate risk evolves and how it interacts with the normal functioning of the real economy. This is the perspective needed in order to design, for example, measures to temper the procyclical tendencies inherent in the financial system. As is known, the Banco de España was a pioneer in this field when, in 2000, it introduced dynamic provisioning. In the initial stages of the crisis the potential of such a tool was evident; however, the subsequent heightening of the crisis also showed its limitations. The interactions between monetary and macro-prudential policy will pose complex challenges to central banks. Theoretically, monetary policy should continue focusing on maintaining price stability; and macro-prudential policy, on ensuring financial stability. In practice, however, action by each of them will inevitably exert a strong influence on the objectives of the other, and that has implications for the institutional design of the macroprudential authority.