the crisis changed our vision of central banking? the credit bubble has already extracted heavy costs on our economies and the welfare of our citizens. all must be done to avoid the repetition of such developments. bubbles are however complex phenomena : hard to detect, hard to prevent, hard to fight. can we do better in the future and what contribution can central banks bring? the crisis has revived the old, but ongoing, debate on whether monetary policy should aim, or not, at ensuring financial stability in parallel to its main objective of price stability. the arguments are well known, on both sides. new ideas are being brought, regarding, in particular, the impact of monetary policy on overall maturity transformation and leverage inside the financial system. it is desirable and healthy that this discussion takes place. let me give you my own reflexion, at this stage : • the primary and dominant objective of monetary policy should remain price stability. any dilution of this fundamental mandate would be take us back three decades and be extremely detrimental to our welfare and prosperity in the long run. • without prejudice to this primary objective, all mandates allow for consideration of other objectives. looking at our experience over the last decade, there is a good case for bringing financial stability higher in our priorities. that may imply, in particular, that, when assessing the economic and financial environment, central banks should take a longer term perspective and be more alert to incipient financial imbalances. • i would note, in passing, that the eurosystem is well equipped to take such a perspective. our " two pillar " approach allows us to look permanently at the dynamics of money and credit aggregates, which are essential to detect both long term risks to price stability and potential threats to financial stability. • but more should be done. it is now broadly accepted that a " macro prudential " approach should be taken when implementing financial supervision. that means looking both at system wide implications of our prudential decisions and their impact on financial imbalances and the real economy. • central banks have a major role to play in this process for four reasons : ( 1 ) they have an incentive to act, since well functioning financial markets are essential for the transmission of monetary policy ; ( 2 ) being equipped to permanently look both at financial markets and economic cycles they may have an informational advantage in analyzing their interaction ; ( 3 ) there independence allows them to produce dispassionate and candid assessments of risks ; ( 4 ) and, finally

christian noyer : central banks in the financial crisis speech by mr christian noyer, governor of the bank of france, at paris europlace, paris, 3 july 2009. * * * introduction ladies and gentlemen, it ’ s a great pleasure for me to address such a distinguished audience. from the outset, central banks have been major actors in fighting the financial crisis. overall, their actions have been broadly applauded. in the period to come, however, steering the economy in an environment of high uncertainty will prove particularly challenging. it is therefore timely to reflect upon the past, present and future course of central banks'actions. today, i would like to address three questions : is monetary policy responsible for the crisis? how to assess the policy response from the central banks up to now? and, finally, to which extent does the crisis change our vision of their role in the future? is monetary policy responsible for the crisis? to those who think it is the case, the standard argument goes as follows : in the aftermath of the equity bubble that burst in 2000, interest rates have been kept too low for too long. this created, for investors, both an incentive and a possibility to take excessive risk. the incentive came from the low level of interest rate where the " search for yield " could only be satisfied by moving to riskier assets and increasing leverage. the possibility was created by ample liquidity and the availability of cheap financing. another criticism of monetary policy owes to its alleged asymmetric response to asset prices. central banks would not lean against bubbles, but were prepared to clean the consequences after they burst. investors were thus led to believe that monetary policies would always bail them out in case of trouble. this created a " macroeconomic put " which could only result in excessive risk taking. i am not fully convinced by those arguments for three reasons : • first, to the extent that the crisis has been triggered by macro economic imbalances, the causes seem more real to me than monetary. specifically, low nominal interest rates, between 2002 and 2005, reflected low real interest rates rather than permissive monetary policies. indeed, when policy rates were progressively raised, in 2004 and 2005, long - term rates did not follow, and the yield curve flattened unexpectedly, creating the famous " conundrum ". the abundance of saving in the world, especially in emerging economies, prevented real rates from rising, which both gave rise to capital exports to the us ( and the accompanying current account