credit / asset - price booms as well as maintain low inflation. on the one hand, the bank for international settlements and others ( e. g. bill white, 2006 ; stephen cecchetti et al., 2002 ) argued that policy should be set tighter than justified by the inflation outlook so as to “ lean against the wind ”. on the other hand, chairman greenspan and others at the federal reserve ( alan greenspan, 2002 ; bernanke et al., 1999 ) advocated only responding to such events in so far as they affected the immediate macroeconomic outlook, but acting aggressively to stabilise markets in the event of a correction, sometimes referred to as “ cleaning ”. the fed broadly followed such a policy during the dot - com boom - bust. before the crisis, i stood some way between these two positions ( bean, 2003 ). on the one hand, a policy of leaning against the wind is perfectly consistent with the practice of flexible inflation targeting once it is recognised that financial instability usually results in a sharp contraction in demand and potential disinflationary pressure. undershooting the inflation target in the near term could then enhance the chances of success further out. on the other hand, there are practical obstacles to the implementation of a “ leaning ” policy. in particular, such a policy involves accepting lower output in the short term in return for uncertain future gains and also runs the risk of precipitating the very collapse one is seeking to avoid. the severity of the recession might appear to tilt the argument in favour of “ leaning ”, but the question still arises as to how effective such a policy would have been in restraining the boom in credit and property prices and at what cost to activity. together with colleagues from the bank ( bean et al, 2010 ), i recently attempted to investigate this question using simple vector autoregressive models of the us and uk economies. i will refer you to the paper for the details, but table 1 shows the results of counterfactual simulations of a pretty aggressive “ leaning against the wind ” policy, in which the policy rate is held around 200 basis points higher over the 2003 – 2006 period. the simulations suggest that the peak in real house prices would have been about 7½ % lower in the united states and some 20 % lower in the united kingdom. the impact on the stock of credit is, though, more modest : just 3 – 4 % lower by the end of 2006. moreover, the

mr. george looks at the prospects for the uk economy and developments towards european monetary union speech by the governor of the bank of england, mr. e. a. j. george, at the liverpool and district bankers ’ institute bi - annual dinner in liverpool on 12 / 3 / 97. it is a very enjoyable - and vital - part of our job at the bank of england to keep in touch with what is going on around the country. and we work quite hard at it - through visits like this one ; through our non - executive directors who have business interests in the regions and through our network of regional agents. now the purpose of these contacts is to help us understand the reality behind our precious monetary and economic statistics, and to help us understand what is pre - occupying you. the economic reality i would say is not at all bad. looking back over the longer term, i detect an important change in attitudes in this country : where before people - both employers and employees - tended to look inwards and backwards, seeking to protect what they had had, now, it seems to me, they are increasingly looking outwards and forwards to new opportunities. it is a fundamental change. and over the past four years or so it has been complemented by a more stable macro - economic environment than most of us can remember in our professional life time. putting these together has brought us consistently low inflation ; steady and sustained growth ; and gradually falling unemployment. and interest rates have been lower and less volatile over this period than they have been for more than thirty years. some people, it ’ s true, still say to me that all this has not had much effect on them - it ’ s not like it was in the boom times! and i recognise, of course, that economic conditions do vary across regions and sectors and between individual companies. more than ever before it ’ s a tough competitive world. but what most people say to me these days is that steady growth and low inflation is exactly what they want so that they can make rational, long - term, decisions in their own businesses, which is what enables them to face the global competition. the major preoccupations that i hear are about whether our recent, more stable, economic environment will continue, and about the implications - good or bad - for that environment of a move to a single european currency. let me say a word first about our domestic economic prospects before turning to europe. in fact, mr. chairman, we set out the