authorities responsible for forecasting the cycle on the basis of yet new models, while the former ones have repeatedly failed in the past? or are we tasking supervisors with becoming 2 / 4 bis central bankers'speeches better at guessing when the cycle will turn by deducing future patterns from observations of the past? do we need yet more authorities attempting to further smoothen the business and financial cycles? what experience do we have with the financial cycle, which is different from the business cycle? and how well do we understand the interaction between the two? research has undoubtedly made progress in this respect and i understand that those working in this area are keen to prove their beliefs in real time. the issue for policymakers, however, is that the input is biased towards action. they thereby underplay the risk of adding an additional layer of policymaking between monetary policy and prudential supervision that might affect our reputation and accountability from both angles, especially when we concentrate on instruments with no clear governance framework in place. current discussion on additional macroprudential tools are based on a simplistic belief that recessions can only be addressed with additional credit, with no thought given to the distribution of credit, and on the idea that all crises can be solved with supply - side measures. we need to better understand what determines the financial cycle ; and we need to better understand macroprudential transmission mechanisms and the effects of policy instruments. this reinforces the need to fully take into account all possible interactions when considering whether to introduce new macroprudential measures or adjust the calibration of existing ones. finally, with the introduction of basel iii, there is general agreement that the capital requirements are adequate. to avoid increasing the burden on banks, some people are proposing creating macroprudential space within the current microprudential stack of capital buffers. one idea is to use the reduction in demand for banks to maintain the highest quality capital for some requirements, resulting from the changes of the latest banking package. however, there are three crucial points in this debate that must not be overlooked. first, for significant institutions, the microprudential stack of buffers falls under the remit of the ecb. i would question whether it is appropriate to change the distribution of powers between the eu and national levels, particularly in the current weak economic environment, and to once again give national authorities a greater say on capital buffers overall. second, the interactions between prudential measures need to be thoroughly assessed.

that the levels of medium - and long - term real interest rates across jurisdictions and markets will always be relevant to the formulation of monetary policy. the difference between normal and abnormal times is therefore not what we are trying to achieve – it is how we strive to achieve it. in normal times, central banks affect this array of interest rates by steering the overnight interest rate and influencing expectations. we do the former through setting policy rates and the latter by communicating transparently our reaction function. this allows market participants to form reasonable assumptions about future short - term rates, which in turn allows our monetary impulses to be transmitted along the yield curve to longer - term interest rates. monetary policy - making becomes more complicated, however, when short - term nominal rates reach the effective lower bound. here, our ability to alter the monetary policy stance relies comparatively less on the level of the overnight rate, and comparatively more on influencing expectations, i. e. on the shape of the yield curve. this is why central banks have introduced forward guidance, which is enhanced communication on the expectations and bis central bankers ’ speeches reaction function of the central bank. it is essentially a natural extension of “ normal ” monetary policy. forward guidance influences the long - term interest rate by acting on both its determinants. it helps steer expectations about the level of future rates. and it lowers uncertainty about this level – that is, reduces the time - value of money or the term premium. yet, as an instrument it also has natural limitations. a monetary policy committee cannot credibly commit to keep interest rates low beyond its horizon of visibility. this is reflected in the specific wording of our forward guidance, in particular the fact that it is outcome - contingent. hence, should further monetary accommodation be needed, it is reasonable to consider other operations aimed at lowering the term premium. this is where targeted asset purchases enter the toolset of monetary policy. targeted asset purchases mean operations aimed primarily at impacting the level of the term premium across maturities and market segments. consistent with public statements made by members of the ecb governing council recently – in particular our president, mario draghi, and my colleague on the board of the ecb, peter praet – i would like to make a few qualifying remarks about the possible use of such purchases by the ecb. first, at its meeting last week the governing council confirmed our baseline scenario – that is, a prolonged period of low inflation followed by a gradual rise in inflation rates towards 2 %