Targeting the price level directly, however, was generally considered not possible since the linkages between policy instruments and prices were somewhat uncertain and contained the long and variable lags. These problems led to two new issues which brought about a revolution in the approach to central banking. These are transparency and improved forecasting. Clearly, monetary policy is most effective in the presence of a firmly established nominal anchor, and the more understandable that anchor is to the public the better. An effective commitment to long-run price stability is just such a nominal anchor that the target rate of inflation communicates to the public the price level the central bank is aiming to achieve at specified dates in the future. Any move away from policy rules for long periods must face and deal with long and variable lags in the economy’s response to changes in policy stance. Improved modeling and forecasting is giving central banks increasing confidence in basing current policy decisions on expected future outcomes. When we sum up these developments in monetary policy, we need a monetary framework which includes the following components. It should be: •  transparent;  •  accountable;  •  predictable and easy-to-monitor; and  •  reliable. This is also why the IT (inflation targeting) countries introduced these institutional and operational features into their monetary policy frameworks. Before passing to the key issues for the success of IT regime, I would briefly like to focus on the basic key requirements of the inflation targeting framework in the literature.

The securities in asset-backed commercial paper (ABCP) conduits serve as collateral for the issuance of asset-backed commercial paper, while repo conduits fund in the repo market. Most conduits are so-called single-seller conduits that only serve individual banks or finance companies. Multi-seller conduits provide funding for asset pools of multiple institutions. Conduits are backed by credit lines from commercial banks, which allow the conduits to have a credit rating. Asset-backed commercial paper conduits are also defined in “Shadow Banking: A Review of the Literature”. Federal Reserve Bank of New York Staff Reports, no. 580, (October) 2011. www.newyorkfed.org/research/staff_reports/sr580.pdf. 2  BIS central bankers’ speeches  Because the boom years resulted in strong earnings, low price volatility and few credit losses, firms were able to operate at extreme levels of leverage. When the housing bubble started to deflate, the vulnerabilities of this type of business model soon became apparent. Heavy reliance on short-term wholesale funding exposed the system to a series of intertwined downward spirals in asset and funding markets. This spread in waves, beginning in the market for asset-backed commercial paper (ABCP) issued by off-balance-sheet conduits, and spreading via auction-rate securities, to the repo, money market and financial commercial paper markets that formed the core financing for market-based financial intermediation. Initial declines in asset prices forced leveraged holders with maturity mismatches to sell assets. This increased price volatility and reduced the value of the assets that collateralized other firms’ borrowings.