rise above their optimal level and thus depress economic activity. third, higher real interest rates and the fall in asset prices that tends to accompany a price decline cause financial institutions'asset quality to deteriorate. as these problems intensify, the operation of a negative cyclical mechanism between falling prices and declining economic activity generates significant costs for the macroeconomy. the bank has continued to implement drastic monetary easing to prevent the economy from being caught up in this negative cyclical mechanism, i. e., from falling into a deflationary spiral. the year - onyear rate of change in the cpi, which had fallen for a time to as low as minus 1 percent, has recently recovered to around minus 0. 2 to minus 0. 3 percent in line with improvements in the output gap. a breakdown by components shows that the year - on - year rate of decline in the prices of goods, which are sensitive to economic developments, is gradually diminishing, and is currently at virtually zero percent. excluding the effects of the rise in petroleum prices and the decline in rice prices and public utility charges, the pace of decline in the cpi is seen to be slowing moderately. the corporate goods price index continues to increase year on year, and the year - on - year rate of decline in the corporate service price index is diminishing. various surveys also suggest that households'and firms'expectations for deflation, which have important implications for the economy, have been improving steadily since around 2001. in this situation, the problems arising from the downward rigidity of nominal wages and the zero bound on nominal interest rates are unlikely to be too serious, and the risk of a negative cyclical mechanism operating between falling prices and declining economic activity is therefore correspondingly small. in fact, the economy has been on a recovery trend in spite of the continuing decline of consumer prices year on year. this suggests that the current decline in prices is qualitatively very different from that experienced during 2001 - 02 when the fall in demand triggered anxiety about the economy falling into a deflationary spiral. vi. effects of quantitative easing the economic and price conditions confronting a central bank change with time. under normal circumstances, the role of monetary policy is to respond to these shifting phases by making the appropriate adjustments to the tightness / easiness of the monetary policy stance. since june 2004, the u. s. federal open market committee has made six cautious 0. 25 percent adjustments to the federal funds rate

" just say no " is easy enough to say, but harder to do when it means cutting colleagues off from a potentially highly profitable fee, or trade, or investment. the internal risk managers i met during my short life in the private sector were technically proficient. they may have been under pressure to agree to risky trades. but what was most lacking, in the case i ’ m aware of, was somebody taking a system - wide view of the risks that were being faced, someone with the capacity to ask tough questions about the possibility of radical changes in the market environment – and then getting management to do something about it. there is a delicate point here. if risk managers are required to assign high probabilities to extreme scenarios, such as those of the last year, the volume of lending and risk - taking more generally will be seriously and dangerously reduced. it is neither wise nor efficient for the management of financial firms or their regulators to require financial institutions to become excessively risk averse in their lending and market activities. but if these institutions pay too little attention to adverse events that have a reasonable probability of occurring, they contribute to excesses of volatility and crises. 17 compensation and risk taking. 18 in its " principles for sound compensation policies ", the fsf specifies ( pp. 2 - 3 ) that : compensation must be adjusted for all types of risk ; " our banks are beyond the control of mere mortals ", financial times, july 8, 2009. a review of corporate governance in uk banks and other financial industry entities, prepared for the uk prime minister and the treasury, july 2009. see also oecd, corporate governance and the financial crisis : key findings and main messages, june 2009 ; and fsf, fsf principles for sound compensation practices, april 2009. the report specifies " ceo or fd ", where fd is the finance director. this paragraph is based on the assumption that there is a rational expectations equilibrium in which companies take reasonable risks and make profits commensurate with those risks. see the report by the fsf, fsf principles for sound compensation practices, april 2009. the oecd report on corporate governance, op cit, contains an excellent summary of the issues relating to remuneration practices, actual and desired from the viewpoint of financial stability and efficiency. for the modern theory see for example lucian bebchuk and jesse fried, pay without performance : the unfulfilled promise of executive compensation outcomes must be symmetric with