2  Kohn (2007), Svensson (2011b), and Woodford (2007) explain why forecast targeting is both a better way of conducting policy and a better description of actual policy than following an instrument rule such as the Taylor rule. 3  See Assenmascher-Wesche and Gerlach (2010), Bean (2009), Bean, Paustian, Penalver and Taylor (2010), Bernanke (2010), Dokko, Doyle, Kiley, Kim, Sherlund, Sim, and Van den Heuvel (2009), IMF (2009), and Kohn (2008, 2009). BIS central bankers’ speeches  3  is relevant for the forecast of inflation and resource utilisation, including the conduct of financial-stability policy when appropriate – remains in my view the best-practice monetary policy before, during, and after the financial crisis. Monetary policy and financial-stability policy are different This leads me to the more general question of what the relation between monetary policy and financial stability should be. For instance, it is sometimes said that the objectives of monetary policy should be expanded to include financial stability (Eichengreen, Rajan, and Prasad 2011, and Eichengreen et al. 2011). Such suggestions give the impression that monetary policy and financial stability are the same thing. But they are not. It is important to conceptually distinguish financial-stability policy from monetary policy and avoid conceptual and practical confusion between the two policies. Confusion risks leading to a poorer outcome for both policies and makes it more difficult to hold the policymakers accountable. Trying to use monetary policy to achieve financial stability leads to poorer outcomes for monetary policy and is an ineffective way to achieve and maintain financial stability.

Specifically, we call for the creation of an International Monetary Policy Committee composed of representatives of major central banks that will report regularly to world leaders on the aggregate consequences of individual central bank policies.”  6  Ferrero, Gertler, and Svensson (2009) provide a suitable model for such thought experiments, a New Keynesian DSGE model of a world with two large countries and tradable and nontradable goods. BIS central bankers’ speeches  7  foreign economy. Everything else equal, this has two consequences for the domestic economy. First, due to increased foreign activity, foreign demand for domestic exports increases somewhat. Second, the interest-rate differential between the domestic and foreign interest rates increases. This will trigger an incipient capital inflow into the domestic economy and appreciation of the domestic currency. Suppose the appreciation is so large as to trigger depreciation expectations that balance the increased interest-rate differential. This will again stabilise the capital flow at zero. Everything else equal, the appreciation of the currency is a real appreciation, which is contractionary for the tradable-goods sector. Assume that this contractionary effect dominates over the initial increase in export demand, so the net effect on the tradable-goods sector is contractionary. Demand for, and the output of, nontradable goods may expand somewhat from the appreciation, but assume that the contraction of the tradable-goods sector dominates so the net effect on domestic output is a contraction. The appreciation also leads to lower inflation, through lower prices on imported goods.