asset prices in developed economies has been deepened and refined. existing theoretical models use fairly specific assumptions to allow for bubbles in general equilibrium, and tend to neglect important aspects which make bubbles costly in the real world. admittedly, not all boom / bust cycles are detrimental and have significant real effects. this is also one of the reasons why the mechanical targeting of asset prices is not a sensible option for monetary policy. however, the experience of the recent financial crisis – which has been accompanied by sharp declines in global economic activity and increasing unemployment in advanced economies – is a vivid reminder that there are boom / bust cycles which have the potential to trigger systemic crises and thus constitute a serious threat to world economic growth. furthermore, as regards the scepticism on the effectiveness of monetary policy in containing asset price bubbles, recent research has detected some additional monetary policy transmission channels that, in essence, relate to the risk - taking behaviour of banks, the signalling effects of monetary policy and the breaking of herding behaviour. taken together, the results then point towards the fact that each of these channels can reasonably be expected to amplify the impact of monetary policy during boom periods. for instance, the “ risk - taking ” channel suggests that banks ’ attitudes towards risk are strongly correlated with the monetary policy stance. in the presence of very considerable intra - financial sector leverage, even relatively modest increases in policy rates can lead to significant changes in credit conditions and market dynamics, to the extent that they alter financial institutions ’ risk tolerance. similarly, mechanisms that operate through the signalling effects of monetary policy or the role potentially played by central banks in discouraging herding behaviour by for a more detailed discussion, see papademos and stark ( 2010 ), especially chapter 6. investors can result in policy rate changes exerting more pronounced effects on asset prices than was typically thought to be the case in the past. regarding the appropriate policy reaction to the build - up of financial imbalances, there seems to be broad agreement that monetary policy would hardly be the first best line of defence against, for example, systemic risk associated with asset markets, let alone asset price bubbles detected in specific market segments. this task would rather fall to regulatory and supervisory policies. but if bubble - like behaviour becomes more widespread and reflected in imbalances in money and credit developments, it becomes a concern for monetary policy too. if the past is of any guidance for the future, monetary policy needs to support regulatory and supervisory policies on two accounts. first,

the ecb ’ s monetary pillar builds on the tradition developed by the most successful central banks prior to the introduction of the euro – a tradition which precedes the advent of inflation targeting, in some cases by decades. let me adopt a stylised incarnation of a flexible inflation - targeting regime, a description which, nonetheless, follows closely early expositions in the literature. inflation targeting has evolved, as we all know, both in theoretical work and in the practice of the inflation - targeting central banks. however, it might still be useful to identify elements in the regime – as it was originally conceived – which have influenced the conduct of monetary policy in the years immediately prior to the crisis more profoundly than was perhaps ideal. i will concentrate on two specific features, the implied short - termism in terms of excessive focus on aggregate demand management, on the one hand, and the systematic disregard of monetary phenomena, on the other, which in my view are essential ingredients for understanding the genesis of the crisis. a key lesson from the current crisis is that, going forward, any monetary policy framework that lays claim to being “ robust ” will have to satisfy the following two requirements – beyond the uncontroversial principles i mentioned earlier : first, the monetary policy strategy needs to be geared towards the medium term to resist the fine - tuning temptation ; and second, the strategy needs to assign a prominent role to developments in money and credit which – as see burns ( 1979 ). as chairman of the federal reserve, burns had long lamented the difficulty for a central bank to control inflation. the crisis has shown convincingly – provide reliable signals of risks to long - term price stability, financial stability and overall macroeconomic stability. in my view, these two requirements are natural complements. the key role of money, both before and during the crisis, has been to maintain a focus on developments in nominal trends at lower frequencies. the case for monetary policy strategies oriented towards the medium term in this context let me elaborate the case for monetary policy strategies oriented towards the medium term. you may ask “ but isn ’ t this exactly what central banks around the world have been pursuing for the past two decades? ” well, perhaps or perhaps not. five years ago, at the jackson hole conference, for example, former fed vice chairman alan blinder described us monetary policy since the late 1980s in terms of the “ resurrection of finetuning ”. 4 moreover, flexible inflation targeting, with its added focus on output stabilis