an important purpose. it reminds us that, for colleagues who have experienced at least one complete cycle in monetary theory, what some younger colleagues call a current challenge is, in fact, just a forgotten lesson from the past. i therefore certainly agree with him that it is useful for us to be reminded of an old truth. forrest capie identified two core purposes in the history of central banking : price and financial stability. the focus in the nineteenth century was financial stability and in the twentieth century the focus changed to price stability. for most central banks, price stability has become the primary objective. it is well accepted nowadays that inflation is ultimately a monetary phenomenon and that there is no long - run trade - off between output and inflation. thus, central bank independence became something of a “ great mantra ” in the twentieth century. but this seems to be no reason for politicians to call into question the independence of central banks from time to time. public backing of the central bank ’ s quest for price stability is indispensable for a sustained culture of low inflation. and, in an era of historically low inflation rates, the damaging effects of inflation might easily be forgotten. one of the current challenges facing central banks is to uphold public acceptance for achieving price stability. 2. 1 price stability as the primary objective price stability and output stabilisation one closely related aspect in this context was pointed out by alex cukierman in his comprehensive survey on central bank independence : once the public becomes accustomed to low inflation rates, it is quite conceivable that central banks feel more inclined to concentrate their instruments on other goals, such as stabilising output. i do not want to dig too deeply into this issue, but just focus on what – in my view – seems to be a fair account of the existing literature. while globalisation has had some impact on inflation in industrialised countries, it is certainly a more stability - oriented monetary policy that deserves the main credit for the decline in inflation rates worldwide over the past 15 years. then, however, we should be highly sceptical about interpretations based on reduced form estimates of flatter phillips curves indicating a possibly more lax attitude towards risks to inflation. because not reacting in a timely manner in the face of those risks entails the danger that the very reasons for a seemingly more benign inflationary impact of shocks – solidly anchored inflation expectations due to improved monetary policy – are jeopardised. this would entail a loss of credibility. given the clear mandate of

as the institution which comes to the aid of markets in times of a liquidity shortage. this is still relevant nowadays, as the recent financial market turbulence has shown. the eurosystem has been called on as a “ liquidity provider of last resort ”. and our interventions have had a stabilising effect on euro money markets. our focus in this respect is not on helping financial markets per se or even on bailing - out distressed institutions, but on alleviating tensions in financial markets where malfunctioning would pose a serious macroeconomic risk to achieving our objective of price stability. therefore, contrary to comments that are sometimes made to the effect that the central bank can do more, namely reduce interest rates below the level normally deemed appropriate, there are good economic reasons why we make a strict separation between the two aspects of liquidity provision, on the one hand, and signals about our general policy stance, on the other. in short, a central bank ’ s interest rate policy is the wrong instrument for combating tensions in money markets. while our liquidity providing operations helped to smooth difficult market conditions, the financial turbulence of the past few months will certainly offer the opportunity for some further debate on the appropriate lessons to be learnt for monetary policy in general. monetary policy and asset prices one aspect that has been debated throughout the past couple of years and also at this conference – a debate which, at a first guess, will intensify – is the question of the proper role of asset prices in the conduct of monetary policy. boom - bust cycles in asset prices with ensuing liquidity crises are of special concern for monetary policymakers for ( at least ) two reasons. first, to the extent that changes in asset prices affect consumption and investment, there might be spill - over effects on inflation. second, the transmission of monetary policy actions to the economy works largely through the financial system. undoubtedly, asset price increases unrelated to economic fundamentals have the potential to reduce the overall welfare of an economy and should be avoided wherever possible. however, there remains the question of how far this is feasible and how it should be achieved. financial market imbalances are often the result of underlying structural imbalances which should be appropriately addressed through policies other than monetary policy. in particular, regulatory measures represent an obvious candidate for suitable ex ante action. nonetheless, it has been argued that central banks might prevent asset price bubbles in the first place by responding to asset prices over and above their expected effect on inflation.