##nometric analysis of official statistics. there are other and often crucially important pieces of information that come to us in more qualitative form. these include information from businesses about what they see happening in the economy. perhaps the most famous example of this in recent years is the productivity acceleration in the us in the mid - 1990s. the extensively revised official us data now show that productivity began accelerating in 1995. however, that was not visible until the vintages released in 1998. but as alan blinder and ricardo reiss have reminded us at this conference, chairman greenspan did not wait until 1998 to conclude that the underlying rate of productivity growth might be increasing. the key reason was that he talked with and listened to people who work in business. already in may 1996, when the fed ’ s model was forecasting increasing inflationary pressures going forward, alan said “ it is very difficult to take the existing structure of the nairus, capacity limits, and the usual potential analysis that we do and square it in any measurable way with what we sense from anecdotal reports ”. 1 in the uk, there does not seem to have been a productivity miracle. but we have had many examples of the importance of qualitative data in making judgements. for instance, there have been significant flows of migration that have expanded the potential labour force. by their nature, such flows are not accurately reflected in official data. but the bank of england ’ s business contacts were able to tell us that the ability to recruit new migrant workers was a growing and significant response to a tight labour market. the third lesson that alan has taught us is that it is the consistency over time of a policy framework that sustains a market economy, as the achievements of the united states over the last 200 years show very clearly. alan, of course, has stressed this in the context of price stability. but it applies transcript of fomc meeting 21 / 05 / 1996. equally well to the system of taxes, property rights and public goods provision on which prosperity in a market economy relies. alan famously defined price stability in the following terms : “ price stability is best thought of as an environment in which inflation is so low and stable over time that it does not materially enter into the decisions of households and firms. ” 2 i would suggest that implicit in this is a prescription that alan might write for all economic policies, not just monetary policy : namely, that economic policy stability is best thought of as an environment in

. access to central bank money or asset swaps should, as far as possible, encourage banks to manage liquidity risk prudently. without the correct pricing structure, the incentives to encourage future risk taking are obvious and potentially large. valuation margins – or haircuts – are used to protect our balance sheet. by themselves, they aren ’ t sufficient to create a general pricing structure. the cost imposed by a margin depends primarily on the difference between the costs of secured and unsecured funding, and that will vary across banks and over time. so the key is in the interest rates charged by the central bank. the second challenge is to overcome the ‘ stigma ’ problem that has plagued the use of central bank facilities throughout the crisis. commercial banks have feared that, by accessing funding from the central bank, they would acquire a ‘ black spot ’ in the market. they have been reluctant to come to their central bank unless in good and extensive company. these are challenges that all major central banks are grappling with. they will not be easy to overcome. but with our international colleagues we are aiming to devise a framework that does so. the prize will be an integrated framework, covering all our lending to the banking system and one that i hope, by making clear the terms on which liquidity will be provided in times of stress, will focus the minds of banks long before those stresses emerge. during my second term as governor i would like to see us establish a framework for financial stability that is on as sound a footing as the one we have successfully established for monetary stability. the measures i have described would go a considerable way to achieving that. but just as no framework for monetary policy can prevent shocks from hitting the uk economy, we need to think carefully about why financial crises have been both persistent and damaging. that leads me to one final thought on which i want to end. for reasons of historical accident we have created over many decades a financial system in which the incentives to monitor risk - taking have been sharply reduced. it is often said that the role of a central bank is to take the punch bowl away just as the party is getting going. that approach has served us well in monetary policy. but all those efforts will come to naught if the opposite applies to the financial sector. if banks feel they must keep on dancing while the music is playing and that at the end of the party the central bank will make sure everyone gets home safely, then over time the parties will become