cat and not, by itself, of such enormous importance to justify devoting monetary policy solely to its control. just about the whole of the world ( whether inflation targeters or not ) has reduced inflation to manageable levels. it seems at least possible that people will begin to regard this task as so easy, and so assured of success, that monetary policy could be asked to do more. i can think of two directions in which we might be asked to do more. first, we have established a wide consensus that monetary policy can do something to smooth the course of the business cycle, but this should not be the primary goal. but if inflation control begins to look easy, people may ask central banks to focus the power of monetary policy more fully in the direction of smoothing the cycle. i do not propose to say more about this, other than to observe that this can, at least in principle, be encompassed within the inflation targeting framework, recognising the legitimate trade - off between inflation variability and output variability. but we also need to remember how much more painful it is to have to wind inflation back down, once price expectations have been disturbed. more interesting, in the current debate, is whether monetary policy should do more to achieve financial stability. a clear dichotomy or specialisation has developed, in which monetary policy is seen as the instrument for maintaining price stability, and prudential regulation is ” assigned to ” financial stability. this dichotomy is increasingly reflected in the vogue of separating the central bank from the prudential regulator. but financial stability is under constant bombardment – reflected in the increasing complexity of the basel ii rules ; the pressure to widen the reach of financial regulation ; the increasing recognition that financial stability problems are coming not just from institutions, but from markets and their evolution ; and the difficulty of staying ahead of the evolution of ever - more - complex financial instruments and products ( driven by competition and sometimes by the objective of getting around prudential regulations ). the ltcm experience is a reminder of how the leading - edge players will be constantly pushing beyond the regulators ’ capacity to understand, let alone react effectively. on top of this we see the evolution of markets, often driven by the desire to minimise risk to individuals, taking actions which may make the overall system more vulnerable – the examples here are the various forms of “ inflation targets and inflation targeting “, remarks by governor laurence h meyer at the university of california at san diego economics roundtable, san

money market mutual fund, “ broke the buck ” as a result of its holdings of lehman securities. banks were not immune to the financial market stress of this period, but they were far less involved in the unfolding of the crisis than were nonbanks – a phenomenon that highlighted the importance of the nonbank sector and the vulnerability of the financial system to its distress. when nonbanks pulled back, other parts of the system suffered. when nonbanks failed, other parts of the system failed. regulatory reforms implemented in the wake of the financial crisis a crisis as deep as the global financial crisis was bound to produce widespread regulatory changes. it was clearly necessary to strengthen the banking system and to better analyze and understand the importance of the links between the banking sector and the nonbank financial sector. with respect to the nonbank financial sector, there was a clear need for greater transparency, less leverage, and more stable forms of liquidity transformation. one important change to the banking sector was the adoption of a macroprudential perspective to supervision and regulation. 5 central bankers and bank supervisors in the united states now regulate and supervise large complex banks not only as standalone entities, but also with consideration of how their actions could affect other firms and activities in a highly connected financial system. within the federal reserve, a tangible manifestation of this macroprudential approach is the liscc – the large institution supervision coordinating committee – that was created specifically to coordinate the supervision of the largest banks and other systemically important institutions. 6 other changes to the banking system in the united states include tighter than basel iii capital and liquidity requirements, heightened prudential standards for the largest banking firms, and stress tests. accounting standards and prudential regulations have also been changed to require banks to recognize their links to nonbank entities, such as direct connections or provision of back - up support. heightened prudential standards require the largest and most interconnected banks to meet capital surcharges and stricter riskmanagement standards than other banks. stress tests evaluate banks ’ ability to remain solvent and liquid when under severe macroeconomic stresses and have incentivized better risk - management and information systems within banks. a variety of reforms have helped address risks in the nonbank sector as well. i will touch briefly on three of those reforms. first, the united states has an unusually large number of independent financial sector regulatory bodies. there is accordingly an especially great need for efficient cooperation and coordination among the various regulators that collectively oversee