, and analyses covering a wide variety of markets ”. in this background, perhaps this is a proper occasion to share with the distinguished gathering today some of my thoughts on dilemmas faced by central banks in their communication policies and the multiple effects of the media. this will be followed by a brief narration of initiatives taken by select central banks and then by a more detailed account of dissemination policies and practices of the reserve bank of india. central banks ’ dilemmas the functioning of the central banks has generally been considered highly secretive if not entirely to be an ivory tower. in fact, a book by william greider on the federal reserve published as recently as 1987 is titled “ secrets of the temple ”. the situation has changed, however. for instance, the european central bank ( ecb ) like most other central banks in the world, is laying greater emphasis on its communications policy, as acknowledged by mr. otmar issing about a year ago. in fact, mr. issing explained the communications problem in the context of “ euro ’ s external exchange rate ” and the rather mixed opinion of the ecb despite its success in its main task. it is clear that the approaches of central banks to communications have changed. what are the reasons for this change? traditionally, central banking policy formulation has been associated with an element of secrecy, and for good reasons, a central bank was considered to be an arm of government. furthermore, financial markets and entities were tightly regulated and functioned the way regulators would like them to behave. however, with financial deregulation and increasing cross border flows, the central banks of most countries have gained some degree of autonomy and with it a sense of accountability. hence, central banks do see some advantage in communicating in as transparent a manner as is appropriate, their policy intentions and operations. well informed market participants enable, though not assure, improved functioning of markets. of course, the policy maker cannot reveal policy cards as it is advisable to maintain an element of surprise or avoid anticipatory actions. yet, in all cases, either exante, or concurrent or at least ex - post, adequate communication of rationale for policies and operations is expected now and, in my view, this is desirable. there are several dilemmas faced by central banks while designing an appropriate communications policy. what should be communicated and to what degree of disaggregation, are one set of issues. the second set relates to : at what stage of evolution of internal thinking and debate

of macro prudential policy. but despite their similarities, there are important differences between these policies pertaining to their focus and scope, the clarity of the policy objective, the policy horizon and the tools used, as set out in table 1. it is sometimes argued that monetary and macro prudential policy are close cousins, and that changes in one can substitute for the other. of course, they both affect the supply of credit in the economy and therefore firms ’ and households ’ spending decisions. in turn, that means that they both affect economic activity and inflation. there is therefore a need for some coordination between them to ensure that they do not operate at cross purposes. this is one reason why it is essential that the central bank is crucially involved in the formulation of macro prudential policy. but despite their similarities, there are important differences between these policies pertaining to their focus and scope, the clarity of the policy objective, the policy horizon and the tools used, as set out in table 1. first, the focus of the two policies is different. monetary policy focuses on the most likely rate of inflation at some future date. by contrast, macro prudential policy aims to avoid some highly adverse and unlikely tail event. since crises occur rarely, it is difficult for the public to monitor the success of macro prudential policy. the policy horizons are also different. monetary policy impacts on inflation with a time lag of about 2 years. since senior central bankers are typically appointed for a period of five or six years, it is reasonably easy for the public to judge their performance and ascertain whether price stability has been achieved. by contrast, asset price bubbles are slow to develop and shocks of sufficient magnitude to burst a bubble happen only rarely. thus, it is possible for macro prudential policy to be too lax for an extended period of time without a collapse occurring. this makes it difficult for the public to judge whether policy makers are achieving their objective. the clarity of the objectives also differs. monetary policy is typically geared at ensuring that inflation is at some announced target level. in the case of the euro area, this level is “ below but close to two per cent ”. since there is monthly data on inflation, it is simple to monitor the central bank ’ s skill in pursuing price stability. assessing financial stability policy is arguably much harder. as an illustration many analysts define it as the absence of financial instability. this difficulty in defining financial stability makes it problematic for the public to judge how