##men to “ seek truth from facts ”, 6 in stark opposition to the ideological approach which had dominated up until then. within the present context the facts are clear : on the one hand, price stability is a necessary precondition for financial stability, although it is by no means a sufficient one ; on the other hand, a key reason for preserving the stability of the financial system is in order to avoid potentially significant risks to price stability, in one direction or the other. let me now turn to discussing several issues concerning the joint implementation of, and the interaction between, monetary and macroprudential policies. ii. issues concerning the joint implementation of, and the interaction between, monetary and macroprudential policies we are currently in uncharted waters. the new mix of macroeconomic policies, with the setting up of macroprudential policies, is being developed as we speak. some issues are already clear : we have two objectives – price and financial stability – which, based on standard economic analysis, means that we will need two separate instruments to achieve them. further, based again on standard analysis, the assignment of instruments to objectives ought to be based on the principle of comparative efficiency. monetary policy is the natural instrument for pursuing price stability. using again the prisma of deng xiaoping, the success of central banks in stabilizing inflation since 1995 strongly supports this view. macroprudential policies – defined as a set of policies aimed at limiting both excessive credit growth and the build - up of systemic risk within the financial system – will have to take care of preserving financial stability. from here onwards, however, things become less clear - cut, and sometimes positively complex. first, the two objectives are qualitatively different. on the one hand, price stability is very easy to define and to measure in terms of a specific price index. as a result, monetary policy is comparatively easy to communicate, and its performance can be assessed in a relatively straightforward way. financial stability, on the other hand, is significantly fuzzier, as it deals with preventing the accumulation of systemic risks, the build - up of asset price persistent misalignments, that some call bubbles, etc.. as a result, it cannot be defined in a straightforward fashion, with reference to, in the extreme case, a single indicator, and ought therefore to be communicated and assessed in a more complex way. second, and crucial, is the unchartered interaction between the two policies. on

the one hand, recent thinking has stressed how monetary policy can contribute to sowing the seeds of future financial instability. low interest rates, for example, can contribute to the build - up of on this, see the discussion in robert shiller ( 2000 ), irrational exuberance, princeton university press. this has been convincingly argued by christina romer ( 1990 ), “ the great crash and the onset of the great depression ”, quarterly journal of economics, 105 ( august ), 597 – 624 as quoted in john lewis gaddis ( 2005 ), the cold war : a new history, penguin press. financial imbalances via the so - called “ risktaking ” channel. 7 simply put, very low interest rates may create incentives for banks to take on more risks. recent research has provided empirical evidence compatible with such a notion. it has been documented, 8 for example, how market based measures of bank ’ s risks as perceived by financial market participants tend to react positively to changes in interest rates, so that a lower interest rate leads investor to perceive banks as less risky. by the same token, several papers 9 have shown that credit standards are correlated with the level of interest rates : lower interest rates, in particular, imply lower credit standards including to customers who are perceived as representing a higher credit risk. on the theoretical side, research done at the banque de france 10 has shown that, when the regulatory environment is not transparent, a decrease in the level of real interest rate increases banks ’ risk - taking behavior, in parts because it may facilitate the under - pricing of risks typical when asset prices rise. another risk, spotted by raguram rajan 11, is that low interest rates lead banks into a “ search for yield ” strategy, in order to maintain a desired – or even institutionally mandated – rate of return. a time - honored principle of finance is that, ceteris paribus, the only way to increase the expected rate of return is to take more risk, and the result of such search for yield is therefore that banks will increase their risk exposure. an alternative channel through which excessively low rates may have contributed to the building up of financial imbalances during the period leading up to the crisis originates from central banks ’ ultimate focus on goods ’, rather than asset prices ’ inflation. during a period characterized by large, benign supply shocks originating from the integration of large developing countries into the global economy, the resulting disinflationary