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

this change in the environment rather slowly, often reluctantly. not least for this reason, the relatively recent prominence of credibility, transparency and accountability in research agendas has been such an important development. it had to emerge as a major issue in the wake of the changed environment, and in the light of some painful regime failures in the early 90 ’ s. the greater emphasis on price stability and the independence that in a great number of countries was thought to be necessary for a central bank ’ s credibility and effectiveness certainly were an important elements in promoting interest in accountability and transparency. i would not say that this globalized situation is a more difficult environment to cope with for a central bank, but it is certainly different. it is a healthier situation in many repects. the very existence of market anticipations and real time reactions is a powerful force tending to weed out what one might call ” rhetorical and political window dressing ” from policy making. the real time flow of information by itself brings a kind of inevitable de facto transparence and at least a measure of accountability. it is easy for the market to see and to assess economic policy in general and monetary policy in particular. this is a healthy development ; after all, all interest and exchange rate policy impact households and companies in major way. also the macroeconomic behaviour of economies changes, although in subtle and less easily identifiable ways. some say that productivity growth has shifted the phillips curve inward, in the us and perhaps in some other economies, possibly for a lengthy period, meaning that higher productivity growth would coincide with – or could be made to coincide with - a widespread expectation of solid price stability continuing, allowing lower unemployment without fuelling inflation. – this would be an extremely attractive prospect. but we really cannot judge whether, in what social and political circumstances, and where, this is at all likely. and where all would seem to turn out nicely, prudently we would have to assume that at some stage the constellation would turn around and real wage demands would catch up with productivity growth. what we do know is that every assumption about productivity growth, for the next few years at the very least, will be uncertain, to say the least. this means that some of the standard pillars of policy debate, like output gaps and nairu ’ s, are eluding us. they may remain useful conceptually but are nevertheless neither quantifiable nor a priori stable enough to be useful when it comes to deciding responsibly on policy.