have precipitated a permanent or highly persistent decline in the output of financial intermediation. i have also considered the possibility that the collapse in house values could be viewed as a permanent loss of wealth affecting household balance sheets. either of these disturbances would require significant real adjustments in the economy. 5 if we view the shock we experienced as largely permanent in nature, in contrast to being largely transitory, then it alters the way we should think about gaps and about the policy responses, particularly appropriate monetary policy. if you accept the idea that money is neutral in the long run, then efforts to use monetary policy to offset such permanent shocks and to close what appears to be a gap will likely be ineffective and perhaps even counterproductive. the real economy must ultimately adjust to such permanent shocks. monetary policy cannot offset the costs or the necessity of such real adjustments, and so it is unlikely to be an effective stabilization tool. looking at the figure again, we see the repeated downward revision in the estimate of potential gdp suggests that the cbo is gradually recognizing that the fall in output was most likely a permanent or at least highly persistent shock to the supply side of the economy. in other words, the cbo ’ s measures of potential output now recognize that the shock that hit the economy damaged the productive potential of the economy in a persistent way, as potential gdp is now lower as far out as 2020. therefore, the output gap is no longer what charles r. nelson and charles i. plosser, “ trends and random walks in macroeconomic time series : some evidence and implications, ” journal of monetary economics, 10 ( 1982 ), pp. 139 – 162. milton friedman, a theory of the consumption function, princeton : princeton university press ( 1957 ). charles plosser, “ a perspective on the outlook, output gaps, and price stability, ” speech presented to money marketeers, new york, may 21, 2009. bis central bankers ’ speeches we thought it was – it has been revised down over time. one can wonder whether five years from now the cbo ’ s potential gdp estimates will gradually converge with the existing growth path of real gdp. at that point, the output gap will have been gradually revised away. the constant revision of estimates of potential output and thus of the output gap also underscore one of the difficulties policymakers have in trying to use gaps as a guide to policymaking in real time. indeed, athanasios orphanides and simon van

financial infrastructure. • london has a reputation as a'clean'market, and it has a commitment to openness in welcoming foreign firms. there is a genuinely level playing - field for foreign firms, with no overt or covert advantages given to domestic institutions. • and in london, we have a non - bureaucratic but rigorous approach to regulation. the fsa brings together within a single organisation responsibility for financial regulation to deal effectively with the oversight of increasingly complex and diverse financial groups. the bank meanwhile retains responsibility for monitoring the stability of the financial system as a whole. this regulatory structure is designed to provide confidence in financial institutions and markets, whilst not stifling innovation and risk - taking. indeed the new financial services and markets act balances the objectives of prudential supervision and consumer protection with an explicit objective of promoting efficiency and competition. • london has flexible labour markets, and low levels of corporate and personal tax. the uk compares favourably with many other european countries in this regard and has been the beneficiary of high levels of overseas direct investment as a result. • english is the language of international finance. • we are lucky enough in london to find ourselves in a convenient time - zone so that market firms can trade with asia in the morning and new york in the afternoon. • and finally, london has great attractions as a place to live! like japan, the uk has a long heritage, and a rich culture. the euro is an opportunity for the city, not a threat since london is an international financial centre, the launch of the euro at the beginning of 1999 was a major event for the city, as well as for the euro area itself. as you know, the uk decided not to participate in economic and monetary union at the outset. but although the uk is'out ', the city of london is effectively'in'already. and this is because of the city's international role, making markets and providing financial services, regardless of currency. so the city of london needed to be well prepared for the introduction of the euro in january 1999. and it was well prepared. as a result, london remains a competitive market place for euro business. you can trade euro in london, just like dollars. there is a wide variety of euro payment routes available in and from london. and london is playing a key role in pioneering the development of the euro markets and financial services across europe. this means that london can, and does, provide a gateway to the euro