ve never really seen anything like the hits to real income the economy has had to endure over the past couple of years. and absence of evidence isn ’ t evidence of absence. this uncertainty about the potential scale of second - round effects has some bearing on how monetary authorities, including the mpc, have responded to this surge in inflation. there ’ s long been a debate about how quickly policy should react to news about the economy. should interest rates be adjusted immediately to a level that ’ s likely to be appropriate for some time? if so, one wouldn ’ t expect to have to make any further changes at the following few meetings ( in the absence of any incoming news that alters the outlook ). or should they respond to inflationary news only by degrees, in which case there ’ s a natural upward slope to the near - term path of interest rates? even having tightened policy at one meeting, there would need to be negative news about the outlook not to do so again at the following one. in the data, there does appear to be a degree of “ smoothness ” in the way official interest rates behave. rather than jumping from one level to another, factoring in all the news at once, the policy rate usually seems to respond to it over time. two explanations have often been suggested. one is uncertainty about the impact of changes in official interest rates. if there ’ s a degree of imprecision in estimates of policy multipliers there ’ s a case for moving a little more gingerly than otherwise. another, offered by the economist michael woodford, is that smoothing the spot interest rate gives the central bank better control of medium - term interest rates, which may matter more in the transmission of policy. in this case i think a third factor may be at play, namely the need to learn about the extent of these “ second - round effects ”. we have inevitably had to learn about them and, therefore, to respond to signs of more persistent domestic inflation as and when they emerge. bank of england the response to demand shocks this is less the case when it comes to plain - vanilla shifts in aggregate demand. these are more common and the appropriate response is well understood : an inflation - targeting monetary authority has to lean against them. indeed, one additional reason for caution, in the face of these big rises in import prices and their impact on domestic inflation, has been the likelihood that they will also weigh significantly on domestic demand. employing again the simple ad / as framework,

saying that i, too, prefer optimal solutions, but – to put it bluntly – regulators and central banks do not live in the “ land of make - a - wish ”. the scope and complexity of the individual and mutually dependent issues which have had to be, or remain to be, solved in an overall package are sometimes like a gordian knot. unlike alexander the great in the legend, however, the g20 states have no magic sword to cut through the knot, and a reasonably timely approach that can be implemented at the global level is perhaps only a first step that may be followed by others at a later point in time. 2. 2 establishment of a designated resolution authority for financial institutions one end of the rope forming the gordian knot involves the institutional set - up for national resolution regimes. in adopting the key attributes, the g20 states committed to establish a designated resolution authority for financial institutions so that the particularities of crisis situations in the financial sector, such as the danger of runs on banks, can be taken into consideration. this new authority will be given a strong mandate. in particular, its tasks will be to promote financial stability, ensure continuity of systemically important financial services, protect depositors, although this could be done – as in germany – in coordination with the deposit guarantee schemes, seek to minimise the overall costs of resolution in home and host jurisdictions and duly consider the potential impact of resolution actions on financial stability in other countries. to fulfil its role, the resolution authority will be equipped with far - reaching instruments. for example, it will be able to remove senior management and replace it with an administrator to take control of the firm, transfer or sell assets and liabilities to a third party or a bridge bank and impose a moratorium with a suspension of payments to unsecured creditors. bis central bankers ’ speeches implementing the key attributes will lead to a gradual alignment of the national legal frameworks for resolution regimes. i am convinced that this will most certainly have a positive impact on financial stability. 2. 3 strengthening international cooperation between national supervisory and resolution authorities a further cluster of problems – the other end of the rope forming the gordian knot – concerns the handling of crisis situations at large complex financial institutions. i don ’ t need to explain to you that insolvency proceedings are currently carried out on a national and territorial level. however, the 30 largest systemically important banks hold on average 53 % of their total assets abroad, according to