guide for monetary policy makers. fortunately, the ecb ’ s monetary policy strategy is well - suited to guide monetary policy in the current situation. at a time when academics are reconsidering the mandates and strategies of central banks, it is important to stress that our strategy is comprehensive and robust. all of you are aware of the main elements of our strategy : • the quantitative definition of price stability • the medium - term orientation • the two pillar - based assessment of risks to price stability i would in particular like to highlight that the high priority we attach to the monetary analysis offsets any over - dependence on single, potentially flawed indicators and concepts, such as the output gap. to illustrate this, let me go back to 2005. in that year, the signals from the economic analysis remained rather mixed and our monetary analysis was indicating upward risks to price stability. this led us to increase interest rates in december 2005 – a move widely criticised, also by a number of ecb watchers. in retrospect, however, the strength of the economic recovery from 2006 and onwards showed that our decision was well - timed. moreover, tightening monetary policy at an early stage may have been one important reason why financial imbalances in the euro area could be kept relatively contained, compared with those in some other regions. there are few historical precedents for steering monetary policy back to a “ normal ” path after a prolonged period of a very accommodative policy. but one unambiguous lesson from the past is that an over - reliance on real - time assessments of the state of the economy and a neglect or even misinterpretation of monetary developments can contribute significantly to policy mistakes. the textbook example of a premature tightening is the increase in reserve requirements in the us after the great depression. to counter the potential inflationary consequences of excess reserves in the banking sector, central bank reserve requirements were increased in 1936. in 1937 / 38, the us economy entered a new recession, which was partly blamed on the monetary tightening brought about by the higher reserve requirements. fiscal policy was also tightened. with hindsight, one can say that it was a failure to appreciate the fragility of the recovery and a misinterpretation of the inflationary consequences of the monetary developments that led to a too early exit. in addition, the statistical base on which monetary authorities had to base their assessment of the state of the economy at that time was thin. examples of tardy exits from monetary accommodation

william c dudley : unconventional monetary policies and central bank independence remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the bank of mexico international conference “ central bank independence – progress and challenges ”, mexico city, 15 october 2013. * * * it is a pleasure to be here today. does the implementation of unconventional monetary policies pose a threat to central bank independence? my short answer, which i will elaborate on, is that while the threat is low, central bankers need to be cognizant of such risks, and clearly explain the motivations for their actions in order to mitigate such risks. the best way for central banks to maintain their independence is to use all their available monetary policy tools to best achieve their objectives. because the use of our unconventional monetary policy tools has been in pursuit of our dual mandate objectives of maximum sustainable employment in the context of price stability, i do not see the use of these tools as creating significant new risks to our independence. as always, what i have to say today reflects my own views and not necessarily those of the federal open market committee or the federal reserve system. to start, it is important to be clear on what we mean by unconventional monetary policies. in my remarks, i am going to focus only on the set of unconventional monetary policies that are relevant today in an environment in which central banks are constrained from lowering their policy rate any further due to the zero lower bound. i will not discuss the type of extraordinary interventions that occurred at the height of the financial crisis. 1 a starting point is that the independence of the central bank with respect to its budget supports its overall independence. the federal reserve ’ s traditional monetary policy framework has helped to assure this budgetary independence. the liability side of our balance sheet consisted primarily of currency and reserve balances on which we did not pay any interest. the asset side consisted primarily of treasury securities. there was no meaningful credit risk and the interest rate risk was limited because assets were generally held to maturity. this, combined with the zero cost of the fed ’ s liabilities, resulted in the federal reserve turning over a large amount of earnings to the treasury each year after covering all of its operating costs and retaining a small portion of its earnings to maintain a level of surplus capital equal to the amount of capital paid - in by member banks. thus, one key question is how this budgetary independence might be threatened through the use of unconventional monetary policies. after all, some