the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances ( and that ) attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output. ” if we had tried to offset the impact on consumer prices of, say, sharp movements in import prices, then we would need to engineer countervailing movements in domestically generated costs, in particular pay. but, given the stickiness of pay and prices, that would necessitate inefficient fluctuations in activity and employment. now during the first decade of the mpc, such shocks were small and generally benign, with access to cheap manufactures from emerging economies providing steady downward pressure on prices. but the past few years have provided a less felicitous backdrop. not only have we had to deal with the consequences of the financial crisis but we have also had to manage several major cost shocks. these include : a 25 % fall in the sterling effective exchange rate ; fluctuations in the price of oil between $ 35 and $ 145 a barrel ; and movements down and up in vat. moreover, the impact of these changes has often proved hard to predict. for instance, we significantly underestimated the pass - through into inflation see e. g. bean et al. ( 2011 ). bis central bankers ’ speeches of the exchange rate depreciation. so it should not be surprising that inflation has been both higher and more variable than during the great moderation. the question is : would outcomes have been materially better under an alternative framework, such as a nominal income target? the first thing to be said is that the idea of directing macroeconomic policy towards targeting nominal income is by no means new. james meade advanced the idea in his 1977 nobel prize lecture, 2 and my mpc colleague, martin weale, spent much of the early part of his career working with meade to develop the idea. 3 samuel brittan, coming from a slightly different perspective, wrote an important iea pamphlet in 1981, which argued that controlling nominal spending was what monetarists were really seeking to achieve. i even wrote my phd thesis4 on the topic over thirty years ago. there is an important distinction between targeting the level or the growth of nominal income. the recent revival of academic interest in the issue relates to the scope for a target for the level of nominal income to provide additional traction for monetary policy when policy rates reach their zero lower bound. some of the

the existing approach, capital charges will tend to be highest for those small, simple banks posing least risk to the financial system as a whole. the systemic risk tax is regressive. this regressivity will tend to worsen the too - big - to - fail problem, by providing regulatory incentives for the large to become larger still. the capital surcharges recently agreed for systemically important institutions, while helpful, are unlikely to retilt this balance. capital regulation may also have acted as a barrier to banking entry, raising the bar for new entrants. neither outcome ( higher risk and lower competition ) are desirable from a societal perspective. bis central bankers ’ speeches ( c ) transparency and market discipline a final unintended consequence is lack of transparency. a large bank may have literally thousands of models, hundreds of thousands of outputs and several million inputs. the height of this information mountain makes scrutiny and aggregation of regulatory capital calculations near - impossible for either investors or regulators. the combination of complexity and manipulation has led to a loss of faith by investors in model outputs, and in particular risk weights, over the past few years. surveys of investors suggest a fairly deep - seated scepticism about risk weights, with only a small fraction believing them trustworthy ( chart 9 ). from a low base, investor faith in these risk weights has continued to fall fast ( chart 10 ). these concerns appear to be reflected in the pricing of bank risk. bank investors appear to have moved towards using simpler metrics, such as leverage ratios, when assessing capital adequacy. there is a positive correlation between banks ’ leverage ratios and their market price - to - book ratios ( hoenig ( 2013 ) ). no such correlation exists for banks ’ regulatory capital ratios. investors seem to have begun pricing the solvency risk they best understand. the lack of transparency about, and investor trust in, risk weights has important implications. for regulators, a lack of transparency can damage the power of market discipline in constraining risk - taking – so - called pillar iii of basel. or, put differently, the complexity of pillar i of the basel tower ( regulatory rules ) risks emasculating pillar iii ( market discipline ). pillar i has become popeye ’ s forearm, pillar iii his bicep. 3 for investors, uncertainty about banks ’ true capital adequacy is priced. where there is uncertainty, they will factor a premium into banks ’ cost of capital.