Once the emergency is over, the present international financial architecture will have to be examined carefully, in terms of its extreme dependence on the decisions of more advanced countries, its governance and its surveillance role, particularly in the financial system. The IMF has made great progress with the World Economic Outlook, which had already warned about the real-estate bubble and global imbalances, and the Global Financial Stability Report. These efforts must now be redoubled. 2  BIS Review 134/2008  From the standpoint of central banks, recent events have underscored not only their role in monetary policy, but also their important function in the stability of the financial system. In this context, research on issues related with financial stability has been dramatically intensified. Clearly, there are varied degrees of consensus regarding how to characterize a good financial policy framework, how to measure it, achieve it and preserve it, as well as its possible tradeoffs with monetary policy. This conference seeks to contribute the study and analysis of these topics, as well as cooperating in our management, as policymakers, of financial stability and associated macrofinancial risk. Today, our work will focus on defining the concepts of financial stability and systemic risk, and on understanding the conceptual frameworks that support their evaluation and the links with and feedback from monetary policy. Garry Schinasi will open the day, introducing what we must understand by financial stability and examining the implications and challenges of understanding systemic risk.

The economic agents and the public need to be convinced that the central bank’s monetary policy decisions are consistently focused over time on achieving the announced aim. In a market-based economy the central bank can directly influence only short-term interest rates through its monetary policy instruments. However, consumption and investment decisions, and thus medium-term price developments, are to a large extent influenced by longer-term interest rates, which depend on private expectations regarding future central bank decisions and future inflation. It is important that these developments in longer-term rates support the objective of maintaining price stability over the medium term. This in turn requires that the central bank is regarded as credible and predictable. A central bank which does not succeed in communicating the principles underlying its monetary policy and is perceived as acting in a non-systematic, discretionary manner will over time endanger its reputation. Therefore, the central bank’s communication should ensure that markets understand the systematic responses of monetary policy to economic developments and the current assessment of the central bank. Successful central bank communication supports predictability and correct price formation in financial markets, contributes to efficient allocation of funds and reduces uncertainty about future interest rates. In an environment where the predictability of interest rate movements and their relation  BIS Review 5/2005  1  with key macroeconomic developments is well understood, firms can better manage their balance sheets. This reduces both their vulnerability to economic shocks and their risk management costs and creates the conditions for better investment decisions.