erkki liikanen : at the interface of research and monetary policy remarks by mr erkki liikanen, governor of the bank of finland, at the meeting of the finnish economic association, helsinki, 17 may 2016. * * * my purpose today is to discuss the use of economics for policy advice in light of four examples. thinking about the relationship between theory and practice, there are some unavoidable differences, or even tensions, between how economic scientists on the one hand, and decision makers on the other see the policy process. both perspectives are necessary and in fact complement each other. cameron cobbold, who was the governor of the bank of england in the 1950 ’ s, has been quoted as saying, “ the central bank is a bank, not a study group ” ( capie 2010, p. 99 ). it is important for central bankers to remember that they are employed to deliver results, and should not be victims of the so - called “ paralysis by analysis ”. at the same time, it is dangerous if policy makers do not realize how dependent they actually are on economic thinking. as keynes wrote, “ practical men who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. ” ( keynes 1936, p. 383 ) it is much better if policy makers are aware of where they stand in relation to current economic thought. how can this awareness be created and maintained in a changing world? there is a certain basic, perhaps mechanical view of the use of economics in policy making that goes back to jan tinbergen. this view considers mainly the kind of economic analysis that is done inside policy organizations such as ministries, central banks and the like. this kind of policy advice consists of forecasts and quantitative policy analyses. these help, for example, monetary policy decision makers to set their given policy instruments to achieve the desired results. ( tinbergen 1955 ). the role of this kind of policy planning processes inside central banks and finance ministries is important, but it is by no means the only type of interaction between professional economists and policy makers. in addition to these processes, i would like to highlight the informal interaction between economists and policy makers which, in the longer scheme of things, might be even more important than the internal policy processes within institutions. what i am talking about here is the dialog that takes place between professional economists and policy makers, in which political doctrines and ways of thinking develop parallel to the latest currents in

banking industry. as separate but interconnected projects, these included the reform of capital adequacy and liquidity regulations, the strengthening of the banks ’ crisis resolution system and the concentration of banking supervision within the euro area under the ecb ’ s responsibility. the practical task for our working group was to consider which forms of business and securities trading should be allowed for deposit banks. the proponents of structural regulation think that the safety nets, formal and informal, present in deposit banking might encourage large deposit banks to take excessive risks and to be overly active in the securities markets. the consequence would be the banks ’ increased propensity to fall into crisis and tax - payers ’ increased exposure to banks ’ risks. to avoid this, the involvement of deposit banks in risky business activities should be restricted. at the same time, there are experts who argue that sufficiently good results could be achieved by tightening the regulations on banks ’ capital requirements and dismantling the safety nets that protect them. thus, the scope for moral hazard would be reduced to such an extent that restrictions on deposit banks ’ scope of business would not be necessary. the banking sector itself has generally been lobbying against both restrictions on activities and tightened capital requirements. structural regulation has a long history especially in the united states where the glasssteagall act, passed in the 1930s, restricted banks ’ securities trading up until the 1990s, when it was repealed. as a consequence of the financial crisis, however, there has been renewed interest in structural regulation, and the united states has now adopted the socalled volcker rule, which prohibits banks from engaging in proprietary securities and derivatives trading. there are, however, some significant exceptions to this rule. britain took a slightly different approach to structural regulation. this was guided by the principle of insulating basic banking activities within banking corporations from other functions ( i. e. ring - fencing ) so as to prevent the transfer of risk, for instance, from securities trading to basic banking. one of the recommendations of my work group was that banking groups should isolate proprietary trading within separate companies. the financing of such companies should be separated from the deposit bank so as to prevent at least large - scale proprietary trading at the risk of the deposit bank, trading that would occur indirectly under the protection of the deposit guarantee scheme ( liikanen et al., 2012 ). what connections did our working group have with academic research? professor marco pagano, who currently chairs the advisory scientific committee of the european systemic risk board (