the crisis changed our vision of central banking? the credit bubble has already extracted heavy costs on our economies and the welfare of our citizens. all must be done to avoid the repetition of such developments. bubbles are however complex phenomena : hard to detect, hard to prevent, hard to fight. can we do better in the future and what contribution can central banks bring? the crisis has revived the old, but ongoing, debate on whether monetary policy should aim, or not, at ensuring financial stability in parallel to its main objective of price stability. the arguments are well known, on both sides. new ideas are being brought, regarding, in particular, the impact of monetary policy on overall maturity transformation and leverage inside the financial system. it is desirable and healthy that this discussion takes place. let me give you my own reflexion, at this stage : • the primary and dominant objective of monetary policy should remain price stability. any dilution of this fundamental mandate would be take us back three decades and be extremely detrimental to our welfare and prosperity in the long run. • without prejudice to this primary objective, all mandates allow for consideration of other objectives. looking at our experience over the last decade, there is a good case for bringing financial stability higher in our priorities. that may imply, in particular, that, when assessing the economic and financial environment, central banks should take a longer term perspective and be more alert to incipient financial imbalances. • i would note, in passing, that the eurosystem is well equipped to take such a perspective. our " two pillar " approach allows us to look permanently at the dynamics of money and credit aggregates, which are essential to detect both long term risks to price stability and potential threats to financial stability. • but more should be done. it is now broadly accepted that a " macro prudential " approach should be taken when implementing financial supervision. that means looking both at system wide implications of our prudential decisions and their impact on financial imbalances and the real economy. • central banks have a major role to play in this process for four reasons : ( 1 ) they have an incentive to act, since well functioning financial markets are essential for the transmission of monetary policy ; ( 2 ) being equipped to permanently look both at financial markets and economic cycles they may have an informational advantage in analyzing their interaction ; ( 3 ) there independence allows them to produce dispassionate and candid assessments of risks ; ( 4 ) and, finally

an average share portfolio is equivalent to around thirty times the annual earnings. the ratio in the united states is even higher, around 35 ( fig. 2 ). price - earnings ratio for sweden and usa affarsvarlden general index and s & p 500 s & p 500 average for 1871 - 1999 note : exceptionally high p / e ratios for sweden in 1992 and 1993 are not shown here sources : global financial data and statistics sweden although long series for the stockholm exchange ’ s p / e ratio are hard to find, it is hardly controversial to say that the present level is well above the historical average. the deviation of share prices from the fundamental conditions that have applied historically is even clearer after a look at the path of real trends in us shares s & p 500, average annual percentage change total real return real share price real earnings / share 1940 - 1981 1982 - 1999 note. averages calculated as geometric mean. somewhat different results may be obtained with an arithmetic mean, an estimated time trend or another base year, but the results still support the conclusion that the earnings trend in recent years is not markedly higher than for the entire post - world war two era. source : global financial data earnings. in the united states the real earnings trend since 1940 has been virtually constant between 2 % and 3 %, while - as i just mentioned - the real return on shares shows a trend break after 1982 ( fig. 3 ). 2 are present share prices fundamentally justifiable? i shall now use a simple model to examine whether the present level of share prices can be justified in fundamental terms. 3 simplifying somewhat, this model equates the value of a share with the present value of the future income the share is expected to generate. a valuation in p / e terms accordingly rests on the assumptions that are made about these future incomes - the future growth of the company ’ s earnings - and the factor by which these incomes are discounted - the stock market ’ s expected return. we can insert alternative values for these assumptions to find the combinations that might justify different p / e ratios ( fig. 4 ). it will be seen that a p / e ratio of 14 can be warranted if the expected real return is 6 % and the real growth of earnings averages 2. 5 %. these figures are all approximately in line with the historical trends. p / e ratios with different combinations of earnings growth & expected return earning earnin s growth % gs expected return % 4. 5 4. 0