the federal reserve and bank of england, issued forward guidance to help clarify their future policy intentions and thereby shape the yield curve. this was terra incognita for central banks. the focus of monetary policy, at least in the 25 years prior to the crisis, had been on controlling the short - term safe rate of interest. crisisinduced monetary interventions widened that focus significantly. by pursuing qe and forward guidance, central banks began to exercise influence beyond overnight rates of interest. and for those central banks that engaged in credit easing, this influence extended further, from safe to risky rates of return across a broad spectrum of assets. these were giant steps. a second aspect of the reinvention was macro - prudential regulation. inflation - targeting was necessary but, by itself, insufficient to curb the financial cycle. the response of governments has been to grant central banks new powers, focused on the needs of the financial system as a whole and towards the needs of the nonfinancial economy, as much as the financial sector. that is what the “ macro ” in macro - prudential meant. macro - prudential policy is gaining ground every bit as quickly as central bank independence did in the 1990s. it has quite radical implications. pre - crisis credit cycles were allowed to operate largely unconstrained. macro - prudential policy overturns that orthodoxy, with policy instead leaning against the credit cycle to moderate its fluctuations, both during the upswing and the downswing. it, too, is a big step forward. a third aspect of the reinvention is in the operations of central banks. during the crisis, central banks flexed their balance sheets as never before. new facilities were introduced that extended liquidity for longer durations against expanded sets of collateral ( public and private ) to new counterparties ( bank and non - bank ). this took last - resort lending to a new level. some central banks went one step further, becoming effective market - makers of last resort in some assets to secure market liquidity. these were new and bold steps. a fourth dimension was transparency. with monetary, regulatory and operational policies all working in overdrive, central banks have had plenty of explaining to do. during the crisis, their actions have shaped the behaviour of pretty much every financial market and institution on the planet. so central banks ’ words resonate as never previously. rarely a day passes without a forensic media and market dissection of some central bank comment. these

as carefully as before in order to assess the implications for the inflation outlook resulting from changes in the balance between nominal demand and supply and in the exchange rate. equally, economic decisions made by businesses and individuals over the next year or so should be unaffected by the change in the target. if the degree of underlying inflationary pressure remains unchanged, and there is no difference in the stance of monetary policy, then the rates of increase of wages, earnings and prices that are consistent with the new target are no different from those which were compatible with the old target. in other words, wage bargaining should be unaffected by the switch in inflation target - as should price setting by firms. of course, the new target will make clearer how much of an increase in money earnings represents a real rise in living standards - a pay increase of 2½ % that was described as a “ cost of living ” rise under rpix will now be shown by the cpi as a ½ % increase in real pay, even though no individual price has changed. the mpc will still need to monitor carefully developments in the labour market in case they signal a change in costs that might threaten the target in future. in jane austen ’ s emma, the awful mrs elton, wife of the parson, dismisses the newlyarrived family in the village with the words : “ they came from birmingham. … one has not great hopes from birmingham. i always say there is something direful in the sound ” but birmingham - and the manufacturing industries with which it has always been so closely associated - have changed. nowhere symbolises this metamorphosis better than villa park. since keynes ’ visit, villa park has changed from a nineteenth century coliseum into a magnificent twenty - first century stadium, focussing on quality rather than sheer numbers. manufacturing industry has also shifted its focus from traditional products valued by weight to high value - added products. but the case for price stability, which keynes made so forcefully, is unchanged, as is the commitment of the monetary policy committee to meet the inflation target - new or old.