and information problems mentioned above ( although it could have ended the great moderation with a deep recession and deflation ). lessons for monetary policy what conclusions can we draw so far from the financial crisis about the conduct of monetary policy and any need to modify the framework of flexible inflation targeting? one obvious conclusion is that price stability is not enough to achieve financial stability ( carney 2009, white 2006 ). good flexible inflation targeting by itself does not achieve financial stability, if anyone ever thought it did. specific policies and instruments are needed to ensure financial stability. another conclusion is that interest - rate policy is not enough to achieve financial stability. the policy rate is an ineffective instrument for influencing financial stability, and policy rates high enough to have a noticeable effect on credit growth and house prices will have a strong negative effect on inflation and resource utilisation, even in sectors that are not experiencing any speculative activity. the use of the policy rate to prevent an unsustainable boom in house prices and credit growth poses major problems for the timely identification of such an unsustainable development, as well as for the assessment of whether policy - rate adjustment would have any noticeable impact on the development, and of whether, in the longer run, the development of inflation and resource utilisation would be better ( bean et al. 2010, kohn 2008, 2009 ). other instruments like supervision and regulation, including appropriate bank resolution regimes, should be the first choice for financial stability. preventing a financial crisis requires not only improvements in the supervision of financial institutions, but also a greater emphasis on the supervision of the financial system as a whole. as regards the regulatory framework, generally, to the extent that financial instability depends on specific distortions, good regulation should aim to attack these distortions as close to the source as possible. macro - see svensson ( 2003 ) for a discussion of policy options before and in a liquidity trap. see assenmacher - wesche and gerlach ( 2009 ), bean ( 2009 ), bean et al. ( 2010 ), bernanke ( 2010 ), dokko et al. ( 2009 ), imf ( 2009 ). prudential regulation that is contingent on the business cycle and financial indicators may need to be introduced to induce better financial stability. possible macro - prudential regulation includes variable capital, margin, and equity / loan requirements. however, one important lesson from the financial crisis is that financial conditions may have a very strong and deteriorating effect on

the transmission mechanism, making standard interest - rate policy much less effective. this motivates more research on how to incorporate financial conditions and financial intermediation into the standard models of the transmission mechanism used by central banks. much progress has already been made in understanding these effects ( see adrian and shin 2010, gertler and kiyotaki 2010 and woodford 2010a ). however, even with much better analytical foundations concerning the role of financial conditions in the transmission mechanism, there will of course, as always, be considerable scope for the application of good judgment in monetary policy. what about “ leaning against the wind ”, the idea that central banks should raise the interest rate more than what appears to be warranted by inflation and resource utilisation to counter rapid credit growth and rising asset prices? it has sometimes not been entirely clear to me whether advocates of the leaning against the wind policy mean that credit growth and asset prices should be considered targets and entered into the explicit or implicit loss functions alongside inflation and resource utilisation. or whether they mean that credit growth and asset prices should still be considered just indicators, and that they emphasise them merely because credit growth and asset prices may have potential negative effects on inflation and resource utilisation at a longer horizon. in the latter case, leaning against the wind is a way to improve the stability of inflation and resource utilisation in the longer run. then it is completely consistent with my interpretation of flexible inflation targeting. more precisely, flexible inflation targeting aims at stabilising inflation around the inflation target and resource utilisation around a normal level. monetary policy then boils down to “ forecast targeting ”, choosing a policy - rate path such that the corresponding forecasts of inflation and resource utilisation best stabilise inflation around the target and the resource utilisation around a normal level. if the central bank uses all relevant information in constructing these forecasts, including the impact of changes in financial conditions on inflation and resource utilisation at any horizon, monetary policy will automatically respond in the best possible way to changing financial conditions ( woodford 2007, 2010a ). taking financial conditions into account becomes a special case of the general rule of “ filtering all information through the forecast ”. only information that affects the forecast should be responded to, whereas information that does not affect the forecast can be disregarded. however, suppose that, for some reason, the appropriate and effective instruments to ensure financial stability are not available, for instance, because