and what about the transmission mechanism of monetary policy? we have identified a number of channels and effects, but how much do we really know about their relative importance in the kind of fluid world in which we live – in that ” slice ” of a constantly evolving constellation that we happen to inhabit at any given moment, with balance sheets, market structures, institutions, behaviour patterns shifting all the time. how much of the accumulated analytical research could possibly provide ground solid enough to allow reasonable assessment of the likely consequences of alternative policy choices? analytical work is advancing impressively on all fronts, but at the same time the world has gone into a mode of continuous change. thus there is probably less and less of theory that one could responsibly commit monetary policy to. fortunately, as we take on board all these vagaries, at the same time we seem to be getting rid of some inconvenient ballast that perhaps looked a little bit too conspiratory for comfort, namely the notion that unanticipated policy may reduce real disturbances. what a relief. unanticipated policy is not an enormously credible possibility in the kind of world into which we have been moving. ambiguity is a poor policy to sell ; it assumes an uninformed public and an uninformed professional market. fortunately, we do not have that. all clearly specified monetary policy decision rules, like the popular taylor rule along with all its variants, depend on reasonably solid knowledge about key inputs, one being the output gap, or equilibriu real interest rates, etc. my lay impression is that not much of that is available with the kind of probability that one would look for in public policy discussions. this means that the credibility of monetary policy cannot be based on a central bank locking itself in by means of a specific irrevocable commitment. the possibility of such locking in of the central bank features prominently in analytical debate outside the central banking community, but it is probably an illusion, a will - o ’ - the - wisp? ( currency board regimes being a separate regime altogether, and i do not think we are generally looking for last resort regimes. ) all this is not a problem for the ecb in particular. it is a reality for all central banks operating in market economies. this will be clear to those who have read bob woodward ’ s recent account of monetary policy making in the us in the 90 ’ s. i suggest that it be read with professor mankiw

exercise at the national level, benefitting from local knowledge, but following common data requirements and methodology. as an example of the extensive methodology, the asset quality review phase 2 manual was published in march. the manual provides specific guidelines for all involved parties on the conduct of relevant steps of the exercise. the comprehensive assessment is indeed comprehensive. first we do a risk assessment addressing key risks in the banks ’ balance sheets, including liquidity, leverage and funding. after that an asset quality review is carried out examining banks ’ balance sheets based on information at the end of 2013. and finally, a stress test, done in collaboration with the eba, complements the asset quality review by providing a forward - looking view of banks ’ riskabsorption capacity under stress. the asset quality review has progressed and some details of its coverage have been released. approximately 135 000 loan books will be examined by the authorities. the loan file review covers both corporate and retail portfolios. it covers total banking book riskweighted assets ( rwa ) of approximately € 3. 7 trillion, representing 58 % of total credit riskweighted assets across the banks subject to the assessment. in addition, 29 banks with material trading book exposures are subject to a specifically tailored aqr of the trading book. the structure of the comprehensive assessment also clarifies the frequently asked question, how this assessment differs from previously conducted eu level stress tests? the key differences to my mind are as follows : • banks ’ risks and asset quality are assessed in a comprehensive manner at the banking union level. assessments are made applying common definitions, abolishing – or at least showing explicitly – any diverging national interpretations. • sufficient corrective measures can be guaranteed as the ecb in its supervisory role will have all the necessary supervisory powers. • quality of assessments is ensured not only by the ecb ’ s strict procedure for ongoing quality assurance, but also by the involvement of third party evaluators. the results of the assessment will be published in a single disclosure, including all three parts of the exercise. the results of the comprehensive assessment will be followed by corrective measures where necessary. the ecb published last week more details on how banks ’ should cover bis central bankers ’ speeches possible capital shortfalls. capital shortfalls will be expected to be covered within six months for those identified in the aqr or the baseline stress test scenario, and within nine months for those identified in the adverse stress test scenario. recapitalisation measures to