tactical flexibility in conducting the monetary policy. over the medium and long term, failure to maintain financial stability may only lead to a renewed flare - up in inflation. this reminds me of standard aircraft safety instructions, according to which, in case of cabin depressurization, the parent should put the oxygen mask on his own face and only afterwards tend to the child ( who, in most cases, is the parent ’ s reason to live ). while looking at long - term price stability as its fundamental objective, the central bank needs to keep a close eye on financial stability and, i would add, on the overall developments in macroeconomic indicators. otherwise, disinflationary gains – however spectacular they might seem at a given point in time – would become utterly unsustainable. 6. the adequate level of inflation : “ low and stable ” vs. “ moderate and stable ” the present crisis brought forward for discussion not only the primary objectives of the monetary policy i have already referred to, but also the adequate level of such objectives. apart from semi - accepting the idea that financial stability must be a monetary policy objective, economists have also called into question the inflation level that must be targeted. recently, blanchard et al. ( 2010 ) stated that “ it was tempting for macroeconomists and policymakers alike to take much of the credit for the steady decrease in cyclical fluctuations from the early 1980s on and to conclude that we knew how to conduct macroeconomic policy. we did not resist temptation. the crisis clearly forces us to question our earlier assessment ”. since we participate today in a seminar dedicated to banking and financial history, please allow me to put things into perspective. in the 1970s, inflation was high and there was a divorce between theoreticians and practitioners concerning the monetary policy effectiveness on real variables. in line with sargent and wallace ’ s policy ineffectiveness proposition ( 1976 ), towards the end of the 1970s many were thinking of monetary policy as being powerless also in the short term, not only in the long term, as friedman ( 1968 ), phelps ( 1968 ) and lucas ( 1972 ) had already stated. however, practitioners were aware that their monetary policy decisions were effective in the short run with respect to both inflation and activity. this divorce lasted for a while, until the new keynesian economists, starting with fischer ( 1977 ) and up to taylor ( 1980 ) and calvo ( 1983 ), found solutions to incorporate nominal rigidities into their models with a view

potential output declined severely in the aftermath of the crisis. a possible resumption in capital inflows would take aggregate demand higher and hence generate an inflationary production gap. emerging countries would resort to fewer forex market interventions, allowing their currencies to appreciate in order to contain inflation. however, the long - term financial stability gains derived from macroprudential measures entail further capital inflows. the tolerance for currency appreciation ( fewer interventions ) may be reversed in light of the larger capital inflows. moreover, a stronger currency may foster further inflows of portfolio investment. this goes to prove that not all measures trying to fend off capital flows are necessarily successful in reducing the incentives for capital inflows. let me conclude by saying that the available measures to address large capital inflows are not safe from side effects. the policy mix needs to be conceived so as to maximize the benefits of capital inflows while insulating against related risks ( zhu, 2011 ). in a world where sustainable economic growth hinges on free markets, capital controls should only be considered as a measure of last resort, if at all. prudential measures should be designed to minimize the distortions they trigger and should be resorted to only after all macroeconomic options have been exhausted. bis central bankers ’ speeches 4. foreign - owned banks – asset or liability? another dominant paradigm which came under scrutiny in recent years is that of the superiority of foreign - owned banks vis - a - vis domestically - owned banks, both in times of sustained growth and in times of crisis. the arguments for this view are well - known and they have to do with improved efficiency, better expertise, alleviation of the shortage of domestic capital, and increased competition. also, some authors ( for instance, haas and lelyveld in 2009 ) claim that the presence of international banking groups on local markets has a positive effect in mitigating the consequences of a crisis. before making my own remarks on this matter, let me introduce some caveats : first, nobody disputes the superiority of foreign - owned private banks with respect to domestically - owned state banks in newly emerged market economies. the comparison needs to be made between foreign - owned private banks and domestically - owned private banks. in this respect, it is worth mentioning that central and eastern europe is the only region in the world where foreign - owned banks dominate as a share of total assets, whereas in the developed markets, latin america or asia,