The prospective creation of a European Systemic Risk Board will partly fill this lacuna. For the reasons I have discussed, financial supervision and regulation clearly cannot be conducted without reference to the monetary policy stance. But, both in finalising the institutional framework and in the conduct of these policies in the future, the principles I have articulated must be respected. We need to ensure that macro-prudential policy is formulated both independently and transparently, guaranteeing a rich flow of information among the relevant authorities, including monetary policy-makers, while at the same time avoiding any blurring of responsibilities, objectives and accountability. Concluding remarks In conclusion, what are the main lessons from recent experience that we should seek to incorporate in any revision to the framework for monetary policy-making? First and foremost, monetary policy should have remained more closely focused on the maintenance of price stability over the medium term. This implies that this objective must be defined clearly and pursued symmetrically. Monetary policy should not be burdened with additional objectives, which it is ill-equipped to pursue. The institutional independence of the central bank is essential to building the credibility required to pursue price stability in a consistent and coherent manner. Dual mandates for monetary policy place this independence at risk. Independence accords central banks the necessary flexibility to deal with a rapidly changing world without putting their credibility at risk.

This is where macro-prudential policy tools come into play. While the analytic basis and calibration of instruments such as pro-cyclical capital requirements or leverage ratios require further elaboration, the hope is that such measures can contain the accumulation of financial imbalances and vulnerabilities without recourse to changes in short-term interest rates. Monetary policy and macro-prudential policy: two policy instruments and two policy objectives. At least in principle, the Tinbergen problem is resolved. But practicalities stand in the way. As I said earlier, it is immediately apparent that monetary policy and macro-prudential policy will interact in a variety of potentially complex ways, throwing up new challenges for policy-making. Of course, what is required is the “right  24  10  See: J. Tinbergen (1952), On the theory of economic policy, Amsterdam, North-Holland. BIS Review 45/2010  combination” of prudential policies and monetary policy – a combination that simultaneously achieves both price stability and financial stability. How is this combination best achieved? We can draw some important lessons from our assessment of the interaction between monetary and fiscal policy in the past. Attempts to develop an optimal “macroeconomic policy mix” are superficially attractive, but have typically foundered in practice. As the responsibilities of different policy-makers become blurred, their incentive to act appropriately is diluted and ultimately the overall coherence of the policy stance is lost. The institutional framework for monetary policy in the euro area reflects these concerns. The single monetary policy is independent and has been assigned an unambiguous objective of price stability.