board their primary objective was price stability – defined as a stabilisation of the inflation rate at around 2 % across a horizon of approximately two years. steering short - term interest rates was considered a sufficient means of achieving this target. central bank forecasts played a key role in monetary policy decision - making, with monetary aggregates increasingly taking a back seat in many forecast models. furthermore, capital markets were mostly assumed to be efficient, meaning that financial imperfections and their potential macroeconomic effects were not taken into account. see a a weber ( 2007 ), from academic to policy maker, cepr - cepremap lectures on policy making, paris, 29 may 2007. see c bean, m paustian, a penalver and t taylor ( 2010 ), monetary policy after the fall, jackson hole 2010 symposium proceedings, federal reserve bank of kansas city. bis central bankers ’ speeches temporary inefficiencies, such as asset price bubbles, were considered possible, but the majority view was that monetary policy could do little to counteract such developments. microprudential supervision was regarded as a sufficient means of containing risks in the financial sector. monetary policymakers should intervene only after a financial crisis had occurred, minimising the macroeconomic damage through resolute interest rate cuts. even though monetary policy proved indispensable and highly successful in containing the crisis and in preventing a meltdown of the financial system, events have cast doubt on this consensus. the question now is whether, and to what extent, monetary policy should take account of financial market developments before a crisis occurs. 3 let me elaborate on some aspects of this in greater depth. 2. 1 a stronger role for financial markets in monetary policy analysis … given the genesis of the crisis, it is undeniable that monetary policy with too short a policy horizon can fail to take account of financial imbalances that eventually spill over to the real economy, thus jeopardising price stability. so, how should monetary policy incorporate the experience of the crisis into its decision - making process? in the pre - crisis phase, monetary policy decisions were often based on models in which the financial sector played only a minor or no role at all. therefore, an obvious and important lesson from the crisis is that the theoretical and empirical foundations of monetary policy must place a greater emphasis on both the banking sector and financial imperfections. as regards the eurosystem ’ s monetary policy strategy, the monetary pillar already contains major elements of such an

economy as it approaches its capacity to produce and reduce the amount of monetary stimulus in place in a timely and measured manner. we want to ensure that inflation stays close to the target so that, over the medium term, our economy can continue to grow at full capacity. what do we mean by " timely and measured "? " timely " relates to the fact that there is always a lag between our policy actions and their effect on the economy. we must be timely and forward - looking because our actions take a year to 18 months to have their full effect on output, and 18 months to 2 years to have their full effect on inflation. " measured " relates to the judgments that we will make as we approach full capacity. if the economic data going forward tell us that we are taking up excess capacity more quickly than expected, we would have to reduce monetary stimulus more quickly. but if the data suggest that the return to full capacity is going more slowly than we thought, we would then need to move more slowly. allow me to close by using the familiar car analogy. over the past year we put our foot on the gas to help us get up the hill of economic difficulties. the prudent thing now, as we return to more normal driving conditions, is to ease off on the gas — ease off, not slam on the brakes — to make sure that we continue our journey along the highway at a safe cruising speed. it is in line with this that we moved, on 16 april, to raise the target for the overnight interest rate by 25 basis points.