the problem and that the central bank needs some “ constrained discretion ” to respond to temporary price - level shocks. lars svensson, deputy governor of sveriges riksbank, also advocates flexible inflation targeting “ applied in the right way and in particular using all the information about financial conditions that is relevant for the forecast of inflation and resource utilization at any horizon – remains the best practice monetary policy before, during and after the financial crisis ” ( svensson, 2010 ). the reserve bank of india has defined itself as not being an inflation targeter in the strict sense. in recent speeches, governor subbarao has put forward two kinds of arguments against committing to an explicit target ( subbarao, 2010 ). one is logistical, with reference to the current absence of an effective, nationally representative index to target. the other is conceptual, referring to the frequency of temporary, often mild supply shocks, to which monetary responses are unwarranted because of lags, but which would be required if inflation were effectively targeted. expectations are sought to be managed through the articulation of medium and long term inflation objectives on the premise that communication is also a tool of monetary policy, and by striving for consistency between the overall macroeconomic assessment and policy actions. the significant decline in the average rate of inflation since the mid - 1990s reflects the effectiveness of monetary policy in managing inflation, in combination with a range of structural reforms. this is not the place to resolve the “ to target or not to target ” debate. the point i want to emphasize is that the approach to the core objectives of monetary policy, whether inflation alone or the growth - inflation balance, does not appear to have been significantly impacted by the crisis. in normal circumstances, i. e., in the absence of a visible domestic or external shock, what was held to be valid before the crisis remains so after it. it is when such shocks strike that the room for maneuver needs to be available, providing enough flexibility in terms of powers and instruments to deal with a variety of shocks. financial stability in hindsight, financial stability has always been a part of this flexibility, on the basis of which central banks in many countries have used their powers to try and avoid catastrophic damage to the financial system. sometimes this has been soft power by way of facilitating mergers and acquisitions of vulnerable institutions ; on other occasions, the muscle of the “ lender of the last resort ” role has been used. in fact, i would argue that it is

associated with financing a current account deficit with volatile capital inflows, which may disrupt economic activity. of course, not all central banks assigned non - zero weights to all dimensions. to a large extent, the post - crisis debate on monetary policy and central banking has been shaped by this asymmetry : should the weights for, particularly, the last two objectives be introduced or changed to reflect the learnings from the crisis? i will now go on to explore current thinking on the components of this framework in three sections : price and output stability together and then financial stability and external stability separately. price and output stability i would argue that very little has changed with respect to the basic approach to price and output stability as a result of the crisis. the basic objective of the monetary policy function of central banks still remains price stability, with or without attention being given to output stability. however a number of issues emerge even within the relatively robust intellectual foundations of this proposition. about a year ago, there was a debate between john taylor and ben bernanke on the appropriate measure of inflation to be used in calculating the appropriate policy position from the taylor rule formula. in response to the claim that the fed ’ s easy money policy was a significant contributory factor to the crisis, bernanke argued that the fed ’ s relatively easy stance was justified by the fact that inflation forecasts were trending significantly downward, while taylor rebutted saying that actual inflation rates and not forecasts were the appropriate inputs into the formula. had this been done, the policy stance would have been different and so might have been the outcome. however, this was a debate on detail, not on the basic approach. one line of argument that has emerged after the crisis is that inflation targeting – assigning a relatively low weight to the output gap in the taylor rule – had been discredited. many economies which did target inflation in this way appeared to have lost a little bit of the flexibility or response to the impending financial shock, which then made its impact even more severe. proponents of inflation targeting have defended the approach by introducing a number of nuances into their cases. charles bean, deputy governor of the bank of england, for example, argues that the crisis does not invalidate the case for targeting, since there needs to be a credible long - term anchoring for inflationary expectations and an explicit target is the best way to achieve that ( bean, 2010 ). rather, the crisis suggests that rigid adherence to the target may be