central bank transparency and accountability make essential contributions to policy effectiveness, in a way that is complementary to ensuring central banks have democratic legitimacy. that remains an important insight in the era of enlarged and empowered central banking. practice moved ahead of theory ; theory caught up and refined practice. and the effectiveness of policy improved as a result. the crisis has meant practice has once again leapt ahead of theory. during its depths, the lessons of history and insights from psychology were arguably more valuable than precisions of dynamic programming. our workhorse models didn ’ t have financial sectors ; meaning questions of financial stability were not even asked, let alone answered. a great deal of improvisation was required to avoid a second great depression. it is vital that we draw on the experience from the crisis to rethink the way we understand the economy, the financial system, and the institutions we supervise. to do so, we need not only to study recent history more deeply but also to apply formal methods to refine our depictions of economic dynamics, as well as the policy tools we have to shape those dynamics in socially desirable ways. we need to catalyse thinking on new approaches towards policies that have assumed greater importance since the crisis from macroprudential policy to bank resolution. see bagehot, w ( 1873 ), lombard street : a description of the money market ; and boyle, a ( 1976 ), montagu norman : a biography, london : cassell. see woodford, m ( 2005 ), “ central bank communication and policy effectiveness ”, nber working paper no. 11898, december. bis central bankers ’ speeches at the bank of england, our enhanced research function, including a new research hub, will bring together staff and thinking from across the institution creating a two - way flow between research and policy. it will seek to foster a shared understanding of the frontier of policy possibilities amongst colleagues and ensure that the insights gained in one policy arena can benefit others. but these efforts will not succeed if they are confined to the corridors of threadneedle and moorgate. the bank recognises that we need to do more to reach out to the wider research community. policymaking can benefit tremendously from advances in all fields of economics and finance ; from psychology to epidemiology ; from computer science to law. that is why i am pleased to see such a diverse range of discussants and attendees at the conference today. in order to focus the conversations we are being clear about the key questions that interest us,

. with this configuration, it is natural to assign the monetary instrument to the pursuit of price stability and the macroprudential instrument to the pursuit of financial stability. moreover, with these slopes and this assignment, no active co - ordination in the setting of the instruments is strictly necessary : a process whereby each instrument is set independently, taking the other as given would converge on the equilibrium, a. that said, appropriate co - ordination and information exchange is desirable to achieve it efficiently and is facilitated in the real world by housing the mpc and the fpc in the same institution, with overlapping memberships, and the scope to meet jointly when required. some sorts of shocks will involve a tightening in both instruments. for instance, consider a bout of “ irrational exuberance ” on the part of households, businesses and investors. the increased optimism is associated with an increase in the demand for goods and services from households and businesses, together with increased demand for credit and a reduction in the credit spread. so both ps and fs shift out to the right, as in chart 12. as drawn, both instruments are therefore tightened. in other cases, it will be appropriate for the instruments to move in opposite directions. for instance a beneficial supply shock will usually generate disinflationary pressure requiring lower interest rates, other things equal. so the price stability schedule shifts in. but it may well also encourage increased borrowing and a compression in spreads, leading the financial bis central bankers ’ speeches stability frontier to shift out. in this example, monetary policy is loosened at the same time as macroprudential policy is tightened ( chart 13 ). superficially this could look as if the monetary and macroprudential policymakers are at odds with each other, though such a rebalancing of the mix of policies is in fact entirely appropriate. there are, however, important qualifications to this somewhat panglossian view of the ability to maintain both price stability and financial stability by assigning monetary policy to the former and macroprudential policy to the latter. compared to the impact of changes in interest rates, we have relatively little experience of deploying macroprudential instruments. and there will often be scope for those affected to work out ways to circumvent them, including by moving activities outside the regulatory perimeter. as federal reserve board governor jeremy stein has noted, monetary policy may be a blunt tool for addressing financial stability risks, but it does have the virtue that it “ gets in all of