a look at liquidity management issues. interestingly enough, in an attempt to rein in the soaring short term spreads on its money market ( e. g. the 3 - month ois - bor spread nosed above 100bp in december ) the fed adjusted its operational framework in a way that roughly closed the gap with its euro area counterpart. in particular, the new term auction facility that the fed implemented in mid - december enlarges both the range of eligible borrowers, from about 20 primary dealers to all banks that are judged to be in generally sound financial condition, and the range of eligible assets that can be brought as collateral to the auction, from t - bonds to corporate bonds and mbs. consequently, longer term liquidity injections by the fed now run along similar lines as the ecb ’ s ones. regarding monetary policy issues, the sharp rate cuts carried out by the fed, including two 75bp cuts, contrast at first sight with the policy stance of the ecb. why such a difference? does this point to a lack of reactivity on the part of the ecb during downturns? this claim, though often heard, is not supported by scientific analyses of past actions. for instance, recent simulations conducted by prof. larry christiano and co - authors suggest that the ecb ’ s actions were indeed more effective in stabilizing output in the aftermath of the 2001 crash ( christiano, rostagno and motto, 2007 ), while different shocks and different degrees of nominal rigidities in both economies accounted for apparent different reaction functions. looking at the present situation, i think that it is possible to reconcile both views if one takes account of the nature and extent of macroeconomic uncertainty that currently affects the us economy as compared with the euro area. economic uncertainty facing policymakers has always been a first - order problem, but it is obviously particularly acute in periods of stress. taking into account some non - benign recent research at the banque de france highlights moral hazard issues associated with the choice of any of these instruments by the llr, cf. ewerhart and valla ( 2007 ), when the strategic behaviour of money market participants is explicitly modelled. dimensions of this uncertainty may be an incentive for central bankers to implement a “ riskmanagement ” approach to monetary policy. this is at least the view that fed gov. f. mishkin has expounded in a recent speech on “ monetary policy, risk management and financial disruptions

the uk has enjoyed since the new monetary framework was put in place. but a fairer measure of the mpc ’ s success is perhaps the fall in inflation expectations since may 1997 ( which can be derived from prices of government bonds ) which has brought the cost of long - term borrowing down to historically low rates. i think that this provides some measure of the growing credibility of the monetary policy framework ; and the expectation that we have moved into an era where we can expect low and stable price conditions. core purpose : financial stability i will say more later about the current position of the uk economy, but first i would like to say something about the other functions of the bank which are perhaps less familiar than the mpc. the bank ’ s second core purpose is maintaining the stability of the financial system. the bank is no longer responsible for the supervision of individual firms but has a clear interest in ensuring the financial system functions smoothly. as the asian crisis in 1998 and the problems in japan show, dislocation of the financial system can impose significant economic costs and it is the bank ’ s role, looking at the system as a whole, to identify potential threats and vulnerabilities. in some respects this interest is integral to the bank as a central bank. for example, secure and efficient payment and settlement systems are an essential condition for economic growth, providing the means for money to flow between individuals, businesses and government. like other essential services - electricity, water - it is easy to take payment systems for granted. but the amounts involved are huge : 30mn transactions are processed every day in the uk clearing system, the value of which totals over £800bn every week. these payments ultimately result in transfers between settlement banks across accounts which they maintain at the bank of england. a failure in the payment system could have an immediate impact on the economy and the bank has worked with clearing banks to reduce the risk to the financial system, first by the introduction of real - time gross settlement and now by moving towards delivery versus payment in securities markets. less esoteric, perhaps, is our interest in the financial stability of individual firms and the structure of the financial system as a whole. while responsibility for individual firms lies with the fsa, the bank takes a close interest in the impact on the wider economy of the regulatory structure and the links between individual institutions and markets. the bank also has a direct role as lender of last resort. in the event that a bank has liquidity difficulties that might