interest rates are affected by financial factors and financial distortions ( curdia and woodford 2009, walsh 2009 ), and what impact financial factors have on the general equilibrium effects of alternative policy - rate paths on inflation and resource utilization forecasts. 11 before such extensions to the modelling framework are operational, policymakers and staff have to improvise and apply unusual amounts of judgment on the effects of the financial crisis on the transmission mechanism. even with much better analytical foundations concerning the role of financial factors in the transmission mechanism, there will of course, as always, be considerable scope for the application of good judgment in monetary policy. in the end, my main conclusion so far from the crisis is that flexible inflation targeting, applied in the right way and using all the information about financial factors that is relevant for the forecast of inflation and resource utilization at any horizon, remains the best - practice monetary policy before, during, and after the financial crisis. but a better theoretical, empirical and operational understanding of the role of financial factors in the transmission mechanism is urgently required and needs much work, work that is already underway in academia and in central banks. the outcome might very well be that financial factors are considered to have a larger role in affecting the transmission mechanism and as indicators of future inflation and resource utilization. if so, central banks would end up responding more to financial indicators, in the sense of adjusting the policy rate and policyrate path more to a given change in a financial indicator. however, this would not mean that financial factors and indicators have become independent targets besides inflation and resource utilization in the explicit or implicit centralbank loss function. instead, it would be a matter of responding appropriately to financial indicators in order to over time best stabilize inflation around the inflation target and resource utilization around a normal level. 12 references bank of england ( 2009 ), inflation report, february 2009, www. bankofengland. co. uk. bean, charles r. ( 2003 ), “ asset prices, financial imbalances and monetary policy : are inflation targets enough? ’ in richards, a., and t. robinson, eds., asset prices and monetary policy, reserve bank of australia, sydney, 48 - 76. bean, charles r. ( 2009 ), “ the great moderation, the great panic and the great contraction ”, schumpeter lecture, annual congress of the european economic association, www. bankofengland. co. uk. borio, claudio and white, william r.

or flawed regulation, supervision or both ; underestimation of the riskiness of securities created with financial engineering ; bad incentives ; excessive funding of long term assets with short - term liabilities ; ratings agencies failures ; flawed assumptions regarding house prices ; elevated household debt ; a belief by bankers that their institutions were too big to fail ; global imbalances ; financial assets accounting ; and too loose monetary policy. it is a long list! across the globe, “ financial innovation …. vastly outpaced regulation and supervision …. financial institutions went on a frenzy of reckless risk - taking …. [ relying ] more on short - term funding, dramatically lowering lending standardsv. ” the banking crisis – a decade on many of these failures are clearly relevant to the catastrophic impacts of the financial crisis in ireland too. they have been well covered in various reportsvi, including the honohan reportvii, which presented five root causes specific to the collapse of the irish banking system : macroeconomic and budgetary policies that contributed to the economic overheating, and which relied to an unsustainable extent on the construction sector and other transient sources for government revenue ; comprehensive failure of bank management to maintain safe and sound banking practices ; a regulatory approach which was too deferential and accommodating, insufficiently challenging and not persistent enough ; an under - resourced approach to bank supervision that, by relying on governance and riskmanagement procedures, neglected quantitative assessment and the need to ensure there was sufficient capital to absorb the growing property - related risks ; and an unwillingness to take on board sufficiently the real risk of a looming problem and act with sufficient decisiveness and force to head it off in time. in other words, a myriad of decisions both large and small, including decisions not to act ( inaction bias ), all underpinned by implicit and explicit assumptions, led to the global financial crisis and how catastrophic its effects were in ireland. there is also a strong argument that ireland, as a small and open economy, was and is more susceptible to the economic cycle and is likely to experience more froth in the good times and is at greater risk of severe downturns than larger, less open economies. the banking crisis – a decade on results of the crisis as is well documented, ireland experienced a credit - fuelled property bubble, which inflated both residential and commercial prices, driving individual indebtedness, reducing overall competitiveness and encouraging an over reliance on property based taxes in the