help us to further advance the science of monetary policy. iii. knowledge gaps and challenges in the science of monetary policy despite the progress made over the past decades, there are still important knowledge gaps in our understanding and modelling of the monetary policy transmission mechanism ; and there are also a number of analytical and statistical ( measurement ) challenges that must be addressed in order to further advance the science of monetary policy. i had prepared a list of such gaps and challenges before reading frederic mishkin ’ s paper. a comparison with his list of further likely advances in the science of monetary policy showed a very large overlap both with regard to the areas for further research and the reasons given to justify the need for, or likelihood of, further progress. what i would like to do is to highlight a number of the commonly identified knowledge gaps and analytical issues, define priorities and raise some additional issues that deserve further analysis. iii. 1. the role of money, credit and the financial system in order to enhance our analysis and assessment of the impact of monetary policy on price developments, as well as on output fluctuations and asset price dynamics, in a modern economy with a sophisticated financial sector, priority must be given to the further development of structural models that incorporate a banking sector, other financial intermediaries and a richer specification of the structure and functioning of financial markets. the integration of the financial system, and of the banking sector in particular, in a state - ofthe - art dynamic stochastic general equilibrium ( dsge ) model that is empirically estimated, would provide a theoretically consistent framework – based on sound microfoundations – that would allow an analysis of the role of money and credit – of liquidity and financing conditions – in the transmission of the effects of monetary policy on the economy. such models have been or are being developed at the ecb, other central banks and universities, but there is scope for further extensions and improvements. although the task is challenging because of the complexities involved in incorporating a realistic specification of the financial sector – with financial market frictions ( or imperfections ) – into such models, it is important from a policy point of view that we deepen our understanding of this transmission channel of monetary policy and its implications for price and output dynamics. moreover, as bernanke, mishkin, gertler and others have shown, and as recent experience has vividly demonstrated, information asymmetries and other financial market imperfections play a crucial role in determining the stability of the financial

technical standards – should further harmonise the regulatory and supervisory framework within the eu. even though the framework has been substantially enhanced, challenges remain. whether the framework will reach its full potential depends on many factors. first, it is important that the new authorities are empowered to act decisively and swiftly. rapid decision - making as well as the independence of regulatory authorities is essential to safeguard financial stability. in this context let me mention that in the us the financial stability oversight council and the federal deposit insurance corporation have been granted more regulatory powers than their counterparts in the eu, although the effectiveness of those powers will ultimately depend on the way they are applied. second, it is important that within our relatively complex institutional framework, the esrb, the three european supervisory authorities and the national authorities collaborate effectively. information - sharing is key. it has been insufficient in the past. will it change in the future? third, the creation of an eu rule book is, of itself, not enough. only when its implementation is harmonised can such a rule book facilitate cross - border activities, and thus contribute to a more integrated financial system. the esas have an important role here to ensure that the rule book is implemented in a consistent way also through their coordination of the activity in colleges of supervisors. in addition, the esas, crucially, have to ensure that the eu - wide stress tests are conducted in a uniform way. we have seen from experience that the credibility of the results of the eu - wide stress tests depends on whether they are conducted with sufficient rigour in all the countries. lack of rigour in one country can undermine the credibility of all. all these elements of the new european supervisory framework are expected to address the challenges related to an integrated area such as the eu. however, in the euro area the very existence of the single currency amplifies the interconnectedness between countries and financial systems and thus the potential for contagion in stress situations. the new eu supervisory framework must therefore be capable of addressing this specificity of the euro area through tailored coordinated actions. financial stability and monetary policy within this changing institutional landscape, close collaboration is required between central bankers, regulators and supervisors, given the intimate connection between monetary policy and financial stability. the european arrangements, with the close links they have established between the ecb and the esrb, recognise this need, while retaining distinct mandates and maintaining a clear division of responsibility. bis central bankers ’ speeches recent events have amply demonstrated how financial crises influence macro