conduct of monetary policy in pursuit of those goals should be free from political control. 2 this conclusion is a consequence of the time frames over the currency swap lines were reinstated with several foreign central banks recently in response to financial disruptions associated with stresses in europe. see board of governors of the federal reserve system ( 2010 ), “ federal reserve, european central bank, bank of canada, bank of england, and swiss national bank announce re - establishment of temporary u. s. dollar liquidity swap facilities, ” press release, may 9 ; and board of governors of the federal reserve system ( 2010 ), “ fomc authorizes re - establishment of temporary u. s. dollar liquidity swap arrangement with the bank of japan, ” press release, may 10. a useful distinction is that between “ goal independence ” and “ instrument independence. ” goal independence for central banks – the freedom of the central bank to set its own goals – is difficult to justify in a democratic which monetary policy has its effects. to achieve both price stability and maximum sustainable employment, monetary policymakers must attempt to guide the economy over time toward a growth rate consistent with the expansion in its underlying productive capacity. because monetary policy works with lags that can be substantial, achieving this objective requires that monetary policymakers take a longer - term perspective when making their decisions. policymakers in an independent central bank, with a mandate to achieve the best possible economic outcomes in the longer term, are best able to take such a perspective. in contrast, policymakers in a central bank subject to short - term political influence may face pressures to overstimulate the economy to achieve short - term output and employment gains that exceed the economy ’ s underlying potential. such gains may be popular at first, and thus helpful in an election campaign, but they are not sustainable and soon evaporate, leaving behind only inflationary pressures that worsen the economy ’ s longer - term prospects. thus, political interference in monetary policy can generate undesirable boom - bust cycles that ultimately lead to both a less stable economy and higher inflation. undue political influence on monetary policy decisions can also impair the inflation - fighting credibility of the central bank, resulting in higher average inflation and, consequently, a lessproductive economy. central banks regularly commit to maintain low inflation in the longer term ; if such a promise is viewed as credible by the public, then it will tend to be self - fulfilling, as inflation expectations will be low and households and firms

jaime caruana : basel ii - back to the future speech by mr jaime caruana, governor of the bank of spain and chairman of the basel committee on banking supervision, at the 7th hkma distinguished lecture, “ basel ii - back to the future ”, hong kong, 4 february 2005. * 1. * * introduction let me begin by expressing my gratitude for this invitation to participate in the “ hong kong monetary authority distinguished lecture ”. i am honoured to join the list of prestigious speakers who have discussed critical issues in economics and finance in this forum, issues made especially prominent by the important role that the hong kong monetary authority plays in promoting financial stability under the leadership of joseph yam. from my perspective as chairman of the basel committee on banking supervision, i am indebted to mr yam for his support and initiative in contributing to the development, and now the implementation, of the new bank capital framework, or “ basel ii ”. “ nothing endures but change, ” wrote the ancient greek philosopher heraclitus more than two thousand years ago. in a world where change is the only constant, success depends on the depth of our awareness of the risks and rewards on the horizon and on the quality of our preparations to respond to them appropriately. that is true not just in the banking industry, but certainly also in the formulation of public policies geared to promoting more sustainable economic growth through greater financial stability. today i would like to address the importance of adopting a forward - looking approach in our framework for financial stability. at the same time, following the advice of the italian statesman and philosopher machiavelli that “ whoever wishes to foresee the future might consult the past ”, i would like to make the case that, to ensure a sound regulatory system for the future, we must look carefully back at the lessons of the past. it seems especially appropriate to discuss, here in asia, the important relationship between financial stability and sound growth. after enduring a period of regional financial distress in the late 1990s, asia ’ s re - emerging dynamism and growing stature can be seen in many indicators : for example, in its capacity as an importer of raw materials and foreign direct investment, and as an exporter of manufactures, financial capital, etc. asia is a central partner with the rest of the world through its roles both in trade and finance. indeed, in a recent address at the centre for banking and monetary studies in geneva, mr yam offered an accurate overview of