, for some time now, been geared around the deposit rate. this is sometimes talked about as a de facto floor system. with monetary policy asset holdings starting to be scaled back, we find ourselves facing the question of which instruments should be used to steer short - term interest rates going forward. 2 there has been some initial reflection on the matter in the eurosystem already but no decisions have yet been made. first of all, price stability can, in principle, be assured in either set - up : both in a corridor system where central bank liquidity is scarce, and in a floor system with permanent excess reserves. what's clear is that the past crises have also brought about changes that are exerting a lasting impact – for example, where the regulation of banks is concerned. and the high level of excess liquidity provisioned by the eurosystem under its asset purchase programmes often means banks have no need to turn to the interbank market. after many years where the banking system has been amply supplied with central bank liquidity, concerns exist. how might the financial system cope if excess liquidity were to be rapidly brought back down to far lower levels? with this is mind, there is no reason to rush into a decision and, say, necessarily head back to an old - style corridor system. in principle, a floor system would also be an option for a future operational framework. what matters, in my view, is that the framework lives up to the following two principles. first, the market should be given more space again. i have fundamental faith in the market mechanism's ability to channel resources to where they are utilised productively. second, the central bank balance sheet should be run down to a much lower, reasonable level within an acceptable timeframe. future monetary policy challenges may mean we need greater room for manoeuvre again. 6 / 7 bis - central bankers'speeches as i see it, there is therefore much to recommend a return to a far smaller central bank footprint in the market going forward. this would mean, in particular, a significantly smaller balance sheet total. the bank for international settlements'chief economist claudio borio recently cited yet another argument for favouring a lean central bank balance sheet : the smaller the balance sheet, the less exposed a central bank leaves itself to political pressure or criticism, e. g. with respect to its independence. 3 for all these reasons, i am an advocate of significantly slimming down the eurosystem '

setting, and specifies how. the communication should explain and convey, as clearly and precisely as possible, the objective and how it will react to any deviations from that objective. put simply, it should convey monetary policy ’ s reaction function, so as to avoid unnecessary uncertainty. this should give economic participants a better understanding of how monetary policy will respond to new information. thus, they can adjust their expectations about interest rates and inflation of their own accord, and hence their response to new information, such as an unexpected oil price hike. and because they do this, the central bank itself does not have to react as much to the changed economic setting. but what exactly does good central bank communication look like? how extensive and detailed does it have to be? it goes without saying that more communication is not necessarily better communication. complete transparency could also cause confusion more than it helps to shed light on things, simply because of the sheer amount of information. 4 nonetheless, central banks should communicate as precisely as possible, because if their signals are not clear enough, the result can be unwanted volatility in the markets, which can also spread to developments in the real economy. precise communication is especially important in times of great uncertainty, for example if, in response to a crisis, unconventional measures are introduced, used and finally terminated. by having a broad communication approach which uses various channels, the central bank can also prevent specific means of communication, such as the press conference, from receiving too much attention. 5 the press conference, in particular, shows that the financial markets react very sensitively to central bank communication. at the same time, however, monetary policymakers also keep a close eye on financial market indicators as key factors in the monetary policy transmission process. this mutual dependence between monetary policy and the financial markets can cause a problem. 6 this problem has already been vividly described by nobel prize winner paul samuelson, who once compared monetary policy to a monkey seeing its reflection in the mirror for the first time : the monkey thinks that by looking at that other monkey it is getting new information, when really it is just looking at its own reflection. 7 when the financial markets largely reflect central bank communication, the informative value of market signals is limited – and this increases the risk of incorrect monetary policy decisions if a blind eye is turned to these interdependencies. the bis ’ s economic adviser, hyun song shin, has also addressed the interplay between financial markets and monetary policy communication, and rightly points