became clear that supply - side factors and the role of expectations also needed to be worked in. thus, today many macro models build in these factors. one example is how most models now work in the impact of the economy ’ s potential output on inflation outcomes. in the us, modellers are faced with growing evidence of an emergent “ new economy ”. the hypothesis is that high rates of growth can be sustained without triggering off inflationary pressures, even at the point of full employment. i understand that staff from the federal reserve constantly update their estimates of key model parameters, such as the nairu2 as well as trend productivity to reflect the features of this new economy. these updated estimates have been used to help shape the fed ’ s forecasts of growth and inflation, thereby ensuring that the policymaking process is an informed one. the second quality i have in mind refers specifically to the model ’ s role in forecasting and policy analysis. a model must have a good track record, in order to serve as a reliable guide to the policymaker. i am not asking for spot - on point forecasts or estimates but, at a minimum, a macro model must be able to provide policymakers with a good feel for the directional effects of various policy options. thirdly, the workings of the model must be transparent. ideally, the structure of the model should correspond to a flowchart of the linkages within the economy. fed governor laurence meyer has said in a recent speech3 that model - based forecasting needs to “ start with a paradigm and end with a story ”. non - accelerating inflation rate of unemployment. to the stern graduate school of business, new york university : “ start with a paradigm, end with a story : the value of model - based forecasting and policy analysis ”. ultimately, when policymakers want to introduce policy changes, they want to know through what channels the effect of this policy will flow and how agents will react to this policy. in other words, policymakers want to know the story going on behind each policy reaction and not just be buried under masses of model output. fourth, macro modelling should adopt a pluralistic approach. policymakers are like consumers while macro modellers are the producers. as the well - known econometrician clive granger4 said, “ it is worth remembering that consumers usually prefer having a choice. it is rare for one model to be superior for all possible purposes : forecasting, policy making, conditional forecasts,

in the advanced economies have generated positive spillovers to emes, through strengthening export demand and enabling conducive financing conditions. at the same time, it must be recognised that monetary policy latitude in emes is to some extent compromised by large capital flows. empirical studies have found that emes ’ monetary policy responds to movements in us interest rates and exchange rates, besides their own domestic macroeconomic conditions. emes should therefore have the flexibility to use the policy tools at their disposal to protect their domestic economies from risks arising from large capital flows. some questions for an integrated policy framework what are some of the questions that an integrated policy framework should seek to address? the existence of [UNK] policy objectives and multiple sources of disequilibria necessitates the use of a range of policy instruments. these can be grouped under three broad buckets : foreign exchange interventions ( fxis ), macroprudential measures ( mpms ) and capital flow management measures ( cfms ). determining which tool is appropriate has been a matter of careful judgement, depending on policymakers ’ objectives, country circumstances, available policy space, and the nature of the shock. policymakers have typically assigned interest rates as an instrument for price stability, mpms for financial stability, fxis for exchange rate stability, and cfms for directly curbing capital inflows and outflows. however, the reality is more complex as policies interact and have overlapping [UNK]. for instance, mpms working through the credit channel can have a dampening [UNK] on aggregate demand and influence the attainment of monetary policy objectives. some countries use cfms to mitigate capital outflows to stabilise exchange rates, if fxis prove [UNK]. an integrated policy framework needs to provide greater clarity on these interactions. we need a deeper understanding of how these instruments can complement, substitute or conflict with one another. for example, we need to better understand the interactions between monetary policy and macroprudential regulation in achieving both price and financial stability. one view is that monetary and macroprudential policies are largely complementary and hence should be used together for better results. for instance, an imf study found that tighter mpms to address financial stability risks are associated with more countercyclical monetary policy responses to macroeconomic shocks. an alternative perspective is that monetary policy can be used to achieve both price and financial stability. by setting the price of leverage and influencing risk taking, monetary policy can lean against the build - up of excessive credit