the risk - reward profile of sovereign bond purchases certainly differs depending on the institutional set - up of the policy area in question. a central bank buying up federal bonds to drive down the long - term risk - free interest rate with a view to speeding up inflation is a different kettle of fish from one acting as a lender of last resort to governments. and this brings me to the issue 3 / 7 bis central bankers'speeches debated in today ’ s second panel : " who is willing to act? passing on the hot potato of policy intervention. " economists like paul de grauwe7 argue that monetary policymakers should channel their inner bagehot when it comes to sovereign debt. in his view, a sovereign that is actually solvent but suddenly falls prey to the sceptical gaze of the market can be driven into insolvency by the rising interest burden. downgraded market perceptions can amount to a self - fulfilling prophecy, a phenomenon which economists refer to as markets with multiple equilibria. in such cases a central bank should come to a country's aid, according to de grauwe. just as acting as the lender of last resort to banks serves to safeguard financial stability, so, too, could central bank intervention in the government bond market fulfil the same purpose. but for me, this stretches the analogy too far. lending to governments is different in that it is not collateralised. walter bagehot advised central banks to lend to banks only against adequate collateral, such that moral hazard is minimised. buying up sovereign bonds amounts to lending to governments without mitigating the risks of moral hazard that come with it. a second difficulty stems from the fact that it is exceedingly difficult to determine the fundamentally justified price for sovereign debt – in other words, it is all but impossible to judge whether the market reaction is justified or overblown. in determining the price by themselves, central banks are setting themselves up for pressure from governments who tend to think that they deserve better rates. it follows that the notion of central banks acting as a lender of last resort to governments is less in keeping with the bagehot tradition than is sometimes assumed. and it runs into arguably far greater problems with moral hazard, especially in a monetary union with fiscally sovereign member states, as i mentioned before. incentives to reform public finances and the real economy are stunted. if action is taken at the national level but accountability is located at the european level, chances

. i don ’ t have to tell you this. this is the shared experience of everybody in modern day jamaica. no doubt you hear it from your clients every day. let me put it another way : a policy with a face value of $ 100, 000 purchased by a young graduate 40 years ago is worth considerably less than 1, 000 of those same dollars at his retirement. in actual fact, the value of 100, 000 of today ’ s dollars in terms of 1971 dollars is $ 177. 22. so, where is the other $ 99, 000 or so of purchasing power? where has it gone? on the face of it, nowhere. the underwriter will still faithfully pay over the face amount or cash surrender value which could still be nominally $ 100, 000. but the expectation that this lump sum could have bought a house or provided an adequate source of investment income well into retirement is worse than a broken promise. time and inflation changed the price of everything except his savings. as it turned out, from the day the policy or contract was signed, the value of the jamaica dollar has been steadily falling. a dollar buys less each day. sometimes the impetus has come from some unexpected shortage of goods which causes the supplier to hike prices. the ability to sustain demand at these higher prices has been helped by the bargaining bis central bankers ’ speeches power of workers who claim higher wages and salaries to compensate for the increased cost of living. property owners charge higher rent, owners of capital charge higher interest and demand higher profits and earners of foreign exchange hold out for higher exchange rates. the government too plays a role. it borrows more to pay higher wages and distribute more financial support and if, instead, the government were to resort to borrowing from the central bank, it would be simply printing more money to fund its activities thus adding fuel to the inflation fire. at the end of the day, those without the ability to adjust their incomes to match inflation – such as pensioners, workers on fixed income and those with little income or property – become progressively poorer and their savings worth less and less. thus a princely $ 100, 000 policy in 1971 eventually becomes little more than a funeral grant today. when will this erosion of value stop? it will not stop entirely. everywhere in the world prices change as the relative value of goods and services change and as basic exhaustible resources become scarcer. but, as happens in the developed world and increasingly in emerging market economies, it is possible to conduct