14  Nyberg (2010) provides more discussion of macroprudential regulation and regulation reform. BIS Review 16/2010  7  significant social costs. I find it helpful to conceptually distinguish financial-stability policy from monetary policy. Different economic policies and policy areas, such as fiscal policy, labor market policy, structural policies to improve competition, etc., can be distinguished according to their objectives, the policy instruments that are suitable for achieving the objectives, and the authority or authorities controlling the instruments and responsible for achieving the objectives. Monetary policy in the form of flexible inflation targeting has the objective of stabilizing both inflation around the inflation target and resource utilization around a normal level. The suitable instruments are under normal circumstances the policy rate and communication, including possibly a published policy-rate path and a forecast of inflation and the real economy. In times of crisis, as we have seen during the current crisis, other more unconventional instruments can be used, such as fixed-rate lending at longer maturities, asset purchases and foreign-exchange intervention to prevent currency appreciation. The authority responsible for monetary policy is typically the central bank. Financial-stability policy has the objective of maintaining or promoting financial stability. The available instruments are under normal circumstances supervision, regulation and financialstability reports with analyses and leading indicators that may provide early warnings of stability threats. In times of crisis, there are instruments such as lending of last resort, variable-rate lending at longer maturities, special resolution regimes for financial firms in trouble, government capital injections and so forth.

He succeeded, proof of which is that the department now has the Pentti J.K. Kouri Career Development Associate Professor of Economics. Today, rather than attempting to elaborate on Kouri’s contribution, I think this is a good opportunity to address some issues on the state of macroeconomics and policymaking, which is the purpose of the conference, and are two aspects to which Rudi and Pentti contributed a lot. If they were here with us today, their deep insights and provocative ideas, regardless of whether we agreed with them or not, would certainly make us think. Changes in the world economy, macroeconomics, and policymaking More than 30 years after Kouri’s influential work, the world has changed dramatically, and so have economic theory and policymaking, especially in emerging market economies. There is a growing role of markets in the determination of prices, in particular interest rates and exchange rates. There is much greater trade and financial integration, which is a source of greater interdependence cross economies, but is also a source of much greater opportunities for developing countries. Finally, financial markets are much more sophisticated, which is also a source of vulnerabilities and opportunities. There has been also a profound evolution of macroeconomics. Developments, such as rational expectations and dynamic inconsistency, changed the views on what macroeconomic policies could achieve. They were also the basis for the discussion of rules versus discretion, and the general preference for the conduct of policies under flexible rules, or constrained discretion.