– a kind of paradox of success. at the same time, the self - stabilizing dynamics of prices in a low - inflation regime endows central banks with considerable flexibility, generating potentially greater leeway for monetary policy to look - through moderate fluctuations in inflation – having succeeded in bringing inflation under control, central banks can enjoy the fruits of their hard - earned credibility. it can thus be argued that the greater role of relative price fluctuations in driving overall inflation create a need for increased flexibility both in terms of greater tolerance for the size of deviations from inflation targets, as well as the time horizon over which inflation is brought back to target. we need to recognize clearly the risks associated with overly active and excessive fine - tuning of policy to hit narrowly defined inflation targets. at a minimum, such efforts are unlikely to work. at worst, they could well be counterproductive. a key challenge in moving in the direction of more flexibility would be in communicating and explaining deviations from inflation targets that may be larger and more persistent. in certain situations, it may be the case that attaching heavy emphasis on a precise numerical target and tying central bank's performance too closely to that target could be counterproductive. the essence of inflation targeting is to anchor expected and actual inflation to a low and stable regime, underpinned by transparent and predictable conduct of policy. the actual average level of inflation within that low and stable regime is second order. indeed, when inflation is low, the welfare costs of fluctuations away from narrowly defined 3 / 4 bis - central bankers'speeches targets tend to be limited. a key reason is that when inflation is low, it no longer exerts a significant influence on behaviour and agents no longer need to spend resources to acquire information about it – they become " rationally inattentive ". importantly, low or even slightly negative inflation rates are not associated with bad outcomes for the economy. empirical evidence suggests that there is no systematic link between mild deflations and output weakness, even if the price declines are persistent. i think as a profession, economists should get over the knee - jerk fear of deflation : the view that deflation is always everywhere associated with some self - reinforcing downward spiral in economic activity. much of that view derives from the great depression which is very much an exception and reflected a unique set of forces that should not be generalized. thus the key adjustment going forward would be greater tolerance for moderate, even if persistent, shortfalls of inflation from

the increasing globalisation of financial markets can create strong contagion effects across markets. problems in one country tend to spill over to other countries very fast, generating a snowball effect where problems grow along with the costs of handling them. furthermore, it has become clear that it can be extremely difficult and costly to deal with distressed banks in a cross - border setting. the reason for this is that there are many stakeholders involved and that the resolution of failing institutions is even more poorly defined at the international level than at the national level. as governments are responsible to their respective parliaments, and ultimately to the voters, there is also a strong tendency to favour national solutions. because of this we have seen a number of uncoordinated crisis resolutions resulting in exceptional levels of public financial support to the banking sector. the handling of the failures of fortis and the three icelandic banks are perhaps the most obvious cases. in the case of fortis, it is interesting to note that the authorities from the benelux countries initially reached an agreement to save the group as a whole. however, as liquidity pressures continued and the burden - sharing agreement proved politically unviable the agreement eventually fell apart. in the end, the authorities had no other choice but to divide the bank along national borders – an outcome which most likely became more costly than a joint solution for the group as a whole. an important factor affecting the authorities ’ abilities to deal with cross - border banks is how banks choose to organise themselves. the most common way of accessing markets outside the home country is to either establish a foreign based branch or a subsidiary and to offer see e. g. navaretti g., calzolari g., pozzolo a. and levi m. ( 2009 ), agenor ( 2001 ), goldberg ( 2002, 2004, 2008 ). services through this legal entity. at present these two forms of foreign operations end up being dealt with within different regulatory frameworks. while subsidiaries are independent companies, supervised by domestic authorities, branches follow the single banking licence schemes and are therefore governed by the regulation and supervision that apply in their home country. this means that when a branch experiences financial difficulties, authorities in the host country have to rely on actions taken by authorities in the home country. however, the home country may not always be willing or able to support the parent bank ( and indirectly the branch ) – especially not in a case where the bank has the larger part of its activities in other countries