- up to financial crises. 13 this specification of the objective function can be derived as an approximation to the maximisation of the welfare, defined over consumption and leisure, of a representative consumer with an infinite horizon ( see rotemberg and woodford, 1997 ). the frontier is named after the us economist john taylor. to implement such a policy reaction function requires an empirical judgement about the factors that drive the volatility of both inflation and output. in principle, these should include those factors in the banking and financial system, including movements in asset prices, that generate fluctuations in demand and output and affect the way in which shocks are transmitted through the economy. in practice, however, rather little attention was paid to the role of the banking system in determining inflation and output. brazier et al. ( 2008 ). the relevant literature tries to integrate standard or workhorse models of financial frictions ( such as the bernanke - gertler ( 1989 ) model of the financial accelerator and the kiyotaki - moore ( 1997 ) model of credit cycles ) into a new keynesian “ sticky ” price model. examples of this literature include bernanke, gertler and gilchrist ( 1999 ), curdia and woodford ( 2009 ) and gertler and kiyotaki ( 2010 ). the only way the addition of a financial sector “ matters ” in these models is if we contemplate exogenous shocks to the financial friction itself. that is not very instructive. several interesting papers presented at a federal reserve conference in washington in march 2012 analysed a wide variety of potential “ financial frictions ” that might create externalities that would justify a policy intervention. my concern is that there seems no limit to the ingenuity of economists to identify such market failures, but no one of these frictions seems large enough to play a part in a macroeconomic model of financial stability. so it is not surprising that it has proved hard to find examples of frictions that generate quantitatively interesting trade - offs between price and financial stability – the finding in these models is that overwhelmingly the most important objective remains stabilisation of inflation. focussing on small deviations around the linearization of the steady - state of a dynamic stochastic general equilibrium model helped to divert attention away from the gradual build up of big risks. bis central bankers ’ speeches existing models, then, do not tell us why stability today may come at the expense of instability tomorrow.

sovereignty. unfortunately, as i stated earlier, these anchors are currently being jeopardized by internal factors. driven by short - term perceived benefits vis - a - vis the real costs of the correction process, the public, the business community, syndicates and stakeholders ask for short - term concessions from the institutions, and particularly from the central bank. judging on the benefits, they require shifting the focus from the objectives and traditional instruments our institutions have been mandated for. these short - term perceived benefits, seemingly, have the potential to offer a right and moral solution to sovereignty versus stability, but they bear the risk of causing the loss of both in the long run. political and institutional factors have not addressed yet some important concerns identified by the bank of albania to have caused financial stability - related concerns and decelerated economic growth in albania. i refer here to collateral execution, lowering of perceived risk arising from the severe political situation and lack of consensus, deceleration of reforms required by the european commission and receiving eu candidate country status, severity of political warfare, and use of the economy and the situation for political gain. lastly, the bank of albania notes that the albanian economy remains under the pressure of market developments in our main trading partners and their economic and financial policies. the measures taken by our trading partners to enhance confidence in their financial systems and adjust the macro - financial imbalances hamper monetary policy transmission in the economy. they heighten public concern and undermine its confidence in the future. these are the very reasons preventing the banking system to finance the economy and the government at lower interest rates and, consequently, the central bank ’ s monetary policy transmission to easing the monetary and financial conditions. what is currently happening represents higher risk premium in the countries of the region for all the reasons referred to earlier, rather than an increase in real interest rates. concluding, i would like to clarify that central banks should make their utmost to preserve the frail macrofinancial balances and bolster public confidence in institutions and the financial system. in this context, the bank of albania, as to date, will continue to foster macroeconomic and financial stability in albania. this is our major obligation arising from the constitution and relevant laws. we are committed to meeting this obligation with dedication and meticulousity. we are fully focused on these two major objectives, just like a good captain focusing on the horizon, rather than on the hands laid on the ship ’ s wheel. the bank of albania believes that, by guarantee