changing the stance of monetary policy, and that this liquidity would flow unimpeded through the financial system. the events of last summer have challenged this consensus. the financial system will be more stable, and the effects of monetary policy actions more predictable, if the central bank directly supports liquidity in a wider range of markets when appropriate. such support, which would be expected to occur only during extraordinary circumstances, could entail expanding the range of terms, collateral, and counterparties for central bank operations beyond what is required for routine monetary policy operations. 6 considerations around a central bank decision to intervene let me elaborate on two of the words i just said : " when appropriate. " how can a central bank determine, with any level of confidence, when actions to support market liquidity are appropriate? at the bank of canada, we have been thinking about the principles that would govern any facilities that we might offer. w. bagehot, lombard street : a description of the money market ( new york : wiley, 1999 ) p. 173. in the bank of canada's case, some of its legal authorities would need to be modernized in order to be able to carry out interventions to the same degree as other institutions. amendments to the bank of canada act that would address this issue are currently before parliament. a central bank may want to make several judgments before deciding to lend to market makers. in particular, it should ask itself four questions : first, is the impairment of the market temporary or permanent? second, will the instruments at its disposal be effective? third, what net benefits could come from intervention? fourth, what are the likely costs? in the heat of financial market turbulence, it is difficult to determine whether a situation of illiquidity ( a market impairment ) is temporary or permanent. to make this determination, it is useful to recall the arrow - debreu theorem of complete markets. 7 in reality, complete markets do not exist because of information costs and because not all agents participate in all markets. a central bank must decide whether its provision of liquidity is a bridge – while information asymmetries are resolved and potential market participants return to the market – or whether it is a pier because there is a permanent impairment. to underscore the distinction, consider again three aspects of recent events. first, before the current market turmoil, many investors relied on rating agencies for credit analysis about structured products, and this information was relatively inexpensive to obtain. the process of financial turbulence

differ from the key monetary policy interest rate. as well, an auction can provide a central bank with the flexibility needed to tailor the provision of liquidity to the specific need. auctions can also provide the central bank with valuable information about the health of a particular market or participant. finally, they can help to restart markets that have stopped by providing a multi - party mechanism to determine asset prices. 9 the search for symmetry before closing, i would like to raise one final issue. much of the discussion about central banks and liquidity in markets has been motivated by current circumstances, in which banks and market makers are unable to create a sufficient level of liquidity themselves. this is a one - sided approach to the issue. one of the reasons that the bank of canada's monetary policy has been successful in anchoring inflation expectations is that we implement policy symmetrically. our actions are motivated as much by inflation threatening to fall below our target as by inflation threatening to rise above it. indeed, our recent decisions to lower our key policy rate were motivated by a concern that future inflation was poised to remain below our 2 per cent target. is a symmetrical approach to liquidity also appropriate? as i mentioned earlier, a lack of liquidity can hamper the efficient allocation of resources and distribution of risk, and complicate the conduct of monetary policy. it is equally true that an overabundance of liquidity – or, more precisely, easy financing conditions for financial assets themselves – can have similar effects. logically, if a central bank were concerned enough to lend to market makers in a time of scarce liquidity, would it not also want to borrow from the same institutions in periods of excess liquidity, again assuming that such periods could be determined with confidence? unfortunately, liquidity instruments such as those i have described today are poorly suited to this task. central banks are the stores of liquidity in our economy, and can readily supply it by agreeing to take less - liquid assets from counterparties in exchange. generally speaking, central banks are not set up to operate in reverse ; that is, they do not have on their balance sheets a ready supply of illiquid assets that can be used to absorb excess liquidity held by banks or market makers. moreover, during an asset boom, they may have limited influence over the confidence of financial market participants. the principle, however, remains. central banks and other authorities should be as concerned about the distortions and inefficiencies created by