And, even for domestic imbalances, short-term interest rates would probably need to be held substantially higher for a persistent period in order to suppress rapid rises in asset prices or growing imbalances. Such policy actions could generate significant economic costs. The practical difficulty of implementing a policy of “leaning against the wind”, where the main policy instrument is short-term interest rates, should not be underestimated. If, as  BIS Review 86/2009  3  policymakers, we were successful in preventing a bubble from inflating, it might appear as if we were responding to phantom concerns. The bubble or imbalance would be nowhere to be seen, but interest rates would be higher, inflation would undershoot the inflation target and we would appear to have inflicted unnecessary economic hardship. That could undermine public faith and support in both the inflation target and the MPC. For me, the single most important lesson from the financial crisis is the need to expand the range of instruments available to policymakers. The inflation targeting framework provides the scope to respond to asset price bubbles and to imbalances that threaten future economic stability. But short-term interest rates are not well suited to managing such risks. The precise design of such new instruments is now the focus of much work and analysis. It is likely that a range of instruments and initiatives will be required. These may extend beyond new regulatory instruments and should embrace the need for greater international policy coordination.

Of relevance is that excessive risk-taking behaviours featured prominently as a key factor contributing to the Crisis. In addition, what makes the Global Financial Crisis different is the extent of the economic and financial inter-linkages within and across borders, which explains the far-reaching impact of the crisis. While the greater interconnectedness of economies and financial systems has brought about opportunities, it has also resulted in greater risks. The Global Financial Crisis has resulted in the re-assessment of how policymakers view the achievement of macroeconomic and financial stability. There is a growing recognition that emerging risks to macroeconomic and financial stability have to be identified and managed in a more holistic and effective manner. As the economy and financial system grow in complexity, policymakers have to strengthen the understanding of the macroeconomic and financial inter-linkages in order to be able to effectively assess the implications of any potential risk on the economy. Before the Global Financial Crisis, the predominant view was that unfettered markets, selfcorrections and minimal interventions would deliver the best economic outcomes. However, recent experiences have shown that policy interventions to correct market misalignments after a crisis may prove too late as the aftermath could be extremely costly. This, therefore, call for policies to be pre-emptive rather than reactive. For policymakers, the aim is to preserve macroeconomic and financial stability, and build the country’s resilience to shocks. Macroeconomics stability is a very important prerequisite for businesses and individuals to undertake economic activities.