high global savings and the consequent downward pressure on long - term interest rates is another factor often mentioned ( bernanke, 2005 ). bis central bankers ’ speeches encourage a shift into riskier assets ( for example claudio borio and haibin zhu, 2008 ) 3. while the contribution of monetary policy to the crisis is controversial – i shall say a bit more on this later – i find plausible the idea that the long period of relative macroeconomic stability lulled investors into a false state of security. this leads to my second lesson from the crisis : the achievement of price stability does not guarantee the maintenance of financial stability and, without further measures, may possibly even compromise it. my next lesson follows on from this and relates to deficiencies in our analytical framework. the canonical macroeconomic model for thinking about the design of monetary policy is that of the new keynesian synthesis ( see richard clarida, jordi gali, and mark gertler, 1999 ; michael woodford, 2003 ). this focuses on the consequences of real and nominal rigidities in goods and labour markets, which give rise to a short - run trade - off between inflation and activity. the dynamic stochastic general equilibrium models in use in many central banks typically embody this synthesis, though usually with quite a few knobs and whistles added on. moreover, the optimal monetary policy in these models looks rather like flexible inflation targeting : the central bank aims to offset completely shocks to aggregate demand, but accepts temporary movements in inflation in the face of shocks to supply so as to limit the volatility in output. financial intermediaries are conspicuous by their absence in these models. that is not to say that mainstream macroeconomists and monetary policy makers ignored financial considerations altogether. it had been long understood that financial frictions could affect both the evolution of the economy and the monetary transmission mechanism. but these frictions typically served merely as modest amplification and propagation mechanisms, rather than a potential source of fundamental disturbance to the economy. one example is the “ financial accelerator ” arising from monitoring costs which give rise to a relationship between the external finance premium paid by a borrower and their financial health ( see ben bernanke, 1983 ). the behaviour of intermediaries was thus seen as being of marginal relevance to the understanding of macroeconomic fluctuations. and many analyses ignored financial imperfections altogether, assuming that that the transfer of funds from savers to borrowers was both frictionless and efficient. to

l loans l'loans l chart 7 : output and inflation policy rate inflation mp as r c r'c'ad is is'y * output y * output chart 8 : interest rates and monetary conditions us uk estimate of banks'marginal funding cost per cent estimate of corporate loan rate estimate of banks'marginal funding cost per cent estimate of corporate loan rate policy rate policy rate bis central bankers ’ speeches table 1 : a leaning against the wind ( latw ) policy real stock of credit ( % change from 2003q1 ) bis central bankers ’ speeches real house prices ( % change from 2003q1 ) output ( % change from 2003q1 ) base united states latw base latw base latw 2005q1 12. 2 10. 5 13. 8 10. 0 7. 6 6. 3 2007q1 28. 1 united kingdom 2005q1 21. 1 23. 9 22. 2 12. 1 12. 5 9. 0 19. 7 26. 7 18. 3 5. 5 4. 7 2007q1 39. 7 43. 0 15. 0 11. 6 9. 0 45. 3