ewald nowotny : central banking after the crisis – responsibilities, strategies, instruments opening remarks by mr ewald nowotny, governor of the austrian national bank, at the 38th economics conference of the austrian national bank, vienna, 31 may 2010. * * * dear chancellor faymann, dear president trichet, ladies and gentlemen, it is my pleasure to welcome you to this year ’ s economics conference on behalf of the oesterreichische nationalbank. we are especially grateful that chancellor faymann and president trichet are here with us this morning. let me also use this occasion to publicly thank the austrian government under chancellor faymann and vice chancellor and finance minister proll for the excellent and respectful cooperation between the austrian government and the austrian central bank in these very challenging times. i would also like to use this occasion, president trichet, to express my full admiration and trust in your leadership of the ecb during the years of crisis and especially also over the past few weeks. we all had to navigate, as you always say, in unchartered waters – and it was extremely important in this situation to have such an experienced captain in command. my own life experience has taught me that we should never underestimate the human factor, also in big policy issues. thus, it is essential for the ecb to have a president who, due to his experience and life - long achievements, is able to communicate convincingly that the ecb is and remains fiercely independent and inflexibly attached to its primary mandate, price stability. we are proud indeed that price stability has been fully maintained in the euro area since the inception of the euro more than 11 years ago. ladies and gentlemen, this year ’ s economics conference is entitled “ central banking after the crisis : responsibilities, strategies, instruments ”. the term “ after the crisis ” seems somewhat premature and obviously needs some clarification. it refers to the specific role of central banks and the lessons to be learned from the experience of the past three years. but we have to keep in mind that crises follow a typical sequencing, as professors reinhardt and rogoff have shown ( again ) recently : a banking crisis tends to evolve into a general crisis of the financial sector, which may then trigger a crisis of the real sector of the economy via financing channels and wealth effects. and this, in turn, may lead to a crisis of public finances via automatic stabilizer effects and additional measures. the big challenge is to prevent

time period? in the uk, the labour market did begin to tighten but it was hard to discern at the time by how much. in mid - to late - 2021 the uk government ’ s furlough scheme – a sensible policy in its own right – was creating uncertainty around the state of the labour market. we can now use tools such public as the bernanke - blanchard approach to assess the timing and scale of this labour market effect. using this approach, and based on work done on the uk case by my colleague jonathan haskel, it became evident economy - wide in late 2021 and early 2022, putting further upward pressure on inflation. we started to tighten monetary policy from late 2021. then, starting in february 2022, came the impact of the ukraine war and russia ’ s illegal actions. this created large supply shocks, in particular to energy and food prices. it substantially increased the risk of de - anchoring of inflation expectations and created the potential for larger second round effects in the form of more persistent higher inflation. as shock came upon shock, so to speak, the transitory judgement looked less appropriate. our response in terms of both the pace and scale of tightening was progressive but measured. why? four reasons stand out for me. first, unlike in march 2020, in 2022 there was not a coincident financial stability shock. it could have happened, for instance in commodity finance markets, but in the event such a shock did not occur. second, the scale of the indirect or second round monetary policy effects was unclear at the time. there were several sources of such uncertainty. one was the transmission mechanism of monetary policy. looking again at the uk case, in terms of the impact of a tightening phase on economic activity and inflation, the channels of transmission have changed over time. this no doubt reflects underlying changes in the economy since the previous tightening phase which was prior to the global financial crisis, most obviously the shift from variable - to fixed - rate mortgages. but it most likely also reflects specific features of the latest tightening phase. one such feature is that it followed an extended period when interest rates were near the lower bound, along with the use of unconventional policy measures, both of which contributed to a relatively fast increase in longer - term market rates when the tightening came. a second feature of this tightening phase has been the size of the shocks we have witnessed and the potential non - linearities and asymmetries that have arisen in the monetary transmission mechanism