that are especially interwoven into the system. i would add only two points this evening. first, just as top - down stress testing could be a useful input to utilising the “ time series ” instruments i have been outlining, so the “ cross - sectional ” add - ons would need to draw upon judgments about how distress at a particular firm would ripple through the system. stress testing could be one useful part of that. but it would also require a deep knowledge of the plumbing of the financial system – the way payments, settlements and collateral transfers operate. and so my second point is that the debate about how best to regulate the banking system must not distract policymakers or practitioners from improving the plumbing, the infrastructure of our markets. this crisis would have been unimaginably worse without effectively collateralised payment systems, many over - the - counter derivative contracts and central - counterparty clearing houses. although progress in those areas proceed below the radar of many, we must renew our emphasis on effective financial market infrastructure. conclusions the current crisis has reminded everyone that our primary interest in regulating the banking sector is the preservation of systemic stability and so of the vital services banks perform in our economy and financial markets. there are two great lessons from the crisis. one is that important banks can fail and so we would be wise to have robust resolution regimes and plans. the second is that the financial system is a system. one that contains complex and shifting inter - connections. and one that can generate pronounced credit cycles, which even if they initially affect only asset values, eventually can materially affect the real economy. this is why the macroprudential debate is so important. it has been a long time coming. 11 this evening i have outlined some of the bank ’ s current thinking on where it might be feasible to develop a toolkit of useful macroprudential instruments. it is not a set of firm recommendations. an open discussion is needed before anyone can reach that point. but i hope it is a useful contribution. we plan to expand on it in a discussion paper over the next few weeks. the beginnings of the macroprudential debate can be traced back at least to crockett, a ( 2000 ) : “ marrying the micro - and macroprudential dimensions of financial stability ”, bis speeches, 21 september 2000.

##s in the macroeconomic model. in chart 10, he shows how the various interest rate paths, differing by around ½ percentage point in the period to summer, could result in differences in the inflation rate of close to 4 percentage points as early as next autumn. monetary policy seems to be having a very strong impact. it would be interesting to hear whether he thinks that relying so heavily on such a model in interest rate setting is robust, and how possible errors in the model should be guarded against. we also know from experience that market participants ’ perceptions can differ from ours, particularly somewhat further ahead. there can be a variety of reasons for these differences and svensson discusses a number of them. it would also be useful to study the volatility surrounding publication of key macroeconomic variables. we would prefer to see lower volatility around monetary policy meetings, and that any surprises are postponed to a time closer to the publication of new macroeconomic data. solberg johansen ( 2008 ) – winner of the bertil ohlin prize for best thesis in international economics at the stockholm school of economics – examines volatility in the yield curve. her findings provide some support for a decrease in volatility around monetary policy meetings, but no strong evidence to suggest that financial market volatility around the publication of new data has changed after norges bank began to publish interest rate forecasts. another study that might provide useful input is ehrmann and fratzscher ’ s analysis of developments in us market rates in the period between monetary policy meetings under two different communication regimes. i will close by concurring with blinder and colleagues ( 2008 ) when they write that : “ … the publication of projected paths for the central bank ’ s policy rate appears to be the “ new frontier ” in central bank communication. but it has been practised in so few countries for so few years that we have little empirical knowledge of its effects as yet. as more data accumulates, this should be a high - priority area for future research. ” it is reassuring to know that the economist that has begun this important work is lars svensson. references blinder, alan s., michael ehrman, marcel fratzscher, jacob de haan and david - jan jansen ( 2008 ) : “ central bank communication and monetary policy : a survey of theory and evidence ”, journal of economic literature 46, 910 - 945. ehrmann, michael and marcel fratzscher ( 2007 ) :