mr. mcdonough assesses the role of the central bank in ensuring a stable price and financial environment and fostering sustainable growth remarks by the president of the federal reserve bank of new york, mr. william j. mcdonough, at the society of investment analysts in dublin on 11 / 2 / 97. i am delighted to have the opportunity to address the society of investment analysts here in ireland, home of my forebears. in my remarks this evening, i want to say a few words on a topic of great importance to both our professions : the role of central banks in ensuring a stable price and financial environment, and fostering sustainable growth. i would also like to offer some thoughts on the importance of a safe and sound banking system for the wellbeing of the economy. as members of the financial community, we all recognize the importance of price stability to the successful long - run performance of the economy. indeed, there now seems to be a worldwide convergence of views among central bankers and investors alike on the importance of price stability as the primary goal of monetary policy. for me personally, stable prices have always been the prism for making monetary policy decisions. as i see it, price stability must be viewed in a long - run context as an ongoing goal, not a one - time objective. that goal requires monetary policy to be oriented beyond the horizon of its immediate or near - term impact on inflation and the economy. the primary purpose of near - term policy actions should be to set the economy on a long - term, permanent path to price stability and sound economic growth. this orientation puts the focus of policy on inflation expectations over the long term - - the time horizon that is appropriate for most saving and investment decisions. businesses and households are understandably concerned about the long - term consequences of inflation and price level uncertainty. this is the frame of reference reflected in the conceptual definition of price stability offered by the chairman of the federal reserve, alan greenspan - - that price stability is achieved when people do not consider inflation a factor in their business and economic decisions. long - term inflation expectations must be anchored to a transparent and rigorous commitment by the central bank to a well - defined standard of price stability, and unavoidable deviations from the goal of price stability must be explained with reference to that standard. in my view, price stability is a means to an end - - the promotion of sustainable economic growth. only with long - term price stability can the economy expect to achieve the

, economic conditions, traditions and institutions. but all successful approaches share two important features : first, they focus on a long - term time horizon and, second, they provide a clear and public standard for the assessment of policy. what is most significant is not the specific way a central bank chooses to seek price stability, but rather the underlying commitment to that goal. while monetary policy aimed at long - run price stability is critical to fostering sustainable economic growth, central banks ’ role in promoting growth and, more generally, a healthy economy goes beyond the conduct of monetary policy. through involvement in financial regulation and supervision, as well as in the oversight of payments system operations, central banks play a key role in preserving and enhancing the safety and soundness of the banking and financial system. all of these central bank functions are mutually dependent and, together, highlight the fact that the structure and workings of the banking system are integral to a country ’ s financial stability and economic growth. clearly, monetary policy cannot succeed in its mission if the underlying financial system is unstable. the importance of an efficient, safe and sound banking and financial system for a country ’ s long - term economic prospects cannot be overstated. in any market economy, the banking and financial system plays a central role in mobilizing a society ’ s savings and in channeling these savings into investment and other productive uses. this intermediation process is one of the core determinants of the pace of a country ’ s economic development. moreover, the banking and financial system must facilitate transactions in an economy by ensuring that they can be effected safely and swiftly on an ongoing basis. both buyers and sellers of goods and services must have confidence that instruments used to make payments will be honored and accepted by all parties. these crucial functions of transforming savings into productive uses and making payments are often taken for granted. but, in fact, it can be difficult to ensure that the legal and institutional framework within which these functions are performed is consistent with the often conflicting goals of free choice, economic efficiency, safety and financial market stability. experience has proven that there is no easy way to shape financial institutions in a manner that appropriately balances these goals under changing economic conditions. today, numerous countries - - including ireland and the united states - - are considering which paths to follow in reforming and modernizing their banking industries. these deliberations are of great importance, because a well - functioning and stable banking and financial system is a critical foundation for long - run growth and