BIS Review 45/2010  11  Second, monetary policy should have been less geared to fine-tuning the economy, in particular to trying to reduce the output gaps which ex post turn out to be very different from their real-time measurement. The long and variable lags in monetary policy transmission mean that a medium-term orientation for monetary policy must be maintained. Temporary deviations from a precise inflation objective are inevitable – monetary policy-makers must focus on containing persistent trends in inflation. Distinguishing between temporary and more persistent shocks to inflation is therefore crucial. Experience has shown that paying attention to specific measures of “core inflation” may mislead monetary policy. An overly mechanical view of such indicators can lead to an underestimation of the strength of inflationary pressures at the global level. Third, policy decisions should have been based on better models of monetary policy transmission. Monetary and financial factors have been too easily dismissed, especially by inflation targeting regimes. Placing greater weight on monetary and credit indicators should allow interest rate decisions to be better calibrated to achieve the appropriate medium-term objectives of monetary policy. Can central banks learn from experience? They can if they are able to recognise what went wrong, rather than sweeping the hard questions under the carpet, and if they are able to adapt their analytical and decision-making framework. Suggesting that monetary policy had nothing to do with the crisis will not help, and might encourage us to make the same mistakes in the future.

The ECB is accountable for the achievement of this objective. All this is understood by other policy-makers. By acting in a transparent way consistent with its mandate, the ECB creates an environment of price stability within which other authorities can take decisions under their responsibility in order to achieve their own objectives. Clarity of responsibility, independence of action and accountability for decisions in an environment of open and frank exchange of information among policy authorities produces the best results. These principles can be readily applied to the relationship between monetary policy and macro-prudential policies. Of course, monetary policy decisions can have implications for financial stability. And the degree of freedom accorded by the medium-term orientation of monetary policy can be used to contain excessive risk-taking by banks. In this sense, monetary policy can support financial stability objectives without prejudice to its primary objective of price stability. But this does not imply that monetary policy should be held jointly accountable for maintaining financial stability, still less that it be assigned an additional financial stability objective. Such measures would only serve to obscure the accountability of monetary policymakers for price stability and dilute the accountability of those authorities responsible for financial stability. All this leads me to re-iterate my earlier conclusion: the primary objective of monetary policy must remain price stability. By contrast, the institutional structure for prudential supervision and regulation at the European level remains at an embryonic stage, especially on the macro-prudential side.