, and be ready to detect those shifts. it should be obvious that technological change, by increasing productivity, often reduces process lags. changes in rates of obsolescence or physical depreciation can change stock – flow lags. and as technology makes more information available more frequently, we might expect that learning lags could speed up. this particular implication is not guaranteed, though. sometimes more information just adds noise. i shall talk more about that in a moment. some lags, especially decision lags, depend on legal and social processes. so they can change, if those responsible for those processes desire it. a good example here is the streamlining of building approval processes in some jurisdictions over recent years. decision processes can also slow down, if more and more rigorous governance is being demanded, whether by external parties or the decision - makers themselves. whatever the reason for it, a change in the length of lags can have huge economic implications. for the hog cycle examples, price dynamics can change noticeably. and where a shorter lag comes from increased productivity and therefore lower cost, we can see marked changes in relative prices. 10 of 12 on lags there can also be big social implications from a change in lags. probably the best example is the enormous decline in the cost of recording and transmitting information over the centuries. ideas, good and bad, can now reach the whole world in seconds. in past centuries, each new copy of a text was done by hand and could take months. the result is more information to more people, not all of it better information. what it means for monetary policy i ’ ve already referenced the long and variable lags of monetary policy. i would like to draw out three more general implications of lags for monetary policy making. first, most forecasts leverage known process lags. for example, we use building approvals to help forecast residential construction. stock – flow lags are also important, but in my view these are often underappreciated in many forecasting models. second, the lags from monetary policy to macroeconomic effects are primarily learning lags. that is why they are variable, as well as long. people take time to realise that demand has increased enough that it ’ s worth hiring a new employee. likewise people take time to decide that demand has increased enough to be worth changing their prices. the time taken will depend on many factors. for example, the lags to changing prices are determined by things such as

is no right life in the wrong one ”. 2. 3 financial market regulation in order to make the financial system more resilient to crisis, and thus to restore greater validity to the principles of competition and liability, changes will also need to be made to financial market regulation. a particularly severe problem which arose during the crisis was one i mentioned earlier, the “ too - big - to - fail ” problem : whenever banks become too large or interconnected to be would up without jeopardising financial stability, this undermines the liability principle and ultimately disrupts competition, and represents an invitation to act irresponsibly. that has to change! recent developments in the financial sector, such as increased indebtedness and the burgeoning growth of the shadow banking sector, require new rules as well. there must three primary objectives behind these new rules. first, banks have to become more resilient ; in other words, they have to acquire a higher quantity of higher - quality capital to protect themselves against potential losses. second, we need effective resolution mechanisms so that, in a worst - case scenario, banks can exit the market without endangering financial stability. third, we need to ensure that these rules cannot be circumvented by taking business elsewhere, such as, for instance, to the shadow banking sector. the rules of the game have to apply to all alike. i would like initially to discuss in more detail the objective of improved capital buffers. the new international rules, generally referred to as basel iii, have already taken us a great deal further in this respect. banks now have to hold more capital and higher - quality capital. however, there are some who believe the basel iii risk - based approach to be fundamentally wrong. the discussion is ultimately about whether capital adequacy rules should be simple or complex. thus far, capital rules have been complex rules : the capital to be held is determined according to the risk profile of each individual bank ’ s assets. critics such as university of bonn economist martin hell wig, however, assert that “ material risks are not captured at all ” by the risk weighting. and he adds that “ banks use the risk weighting to expand their business to, in some cases, one hundred times their capital. ” and yet the fundamental theory behind risk weighting is quite plausible : if the same percentage of capital is to be held for all assets across the board, this gives banks an incentive to invest particularly in