to monetary policy. somewhat simplified, it involved central banks setting a single short - term interest rate on the basis of forecasts of inflation ( relative to an explicit target or informal objective ) and of economic activity. 3 with money markets functioning well and banks responding to interest rate changes, the financial system played an important but subsidiary role in setting policy. will this approach be retained? how will monetary policy frameworks – stone et al. ( 2011 ) provides a useful overview of the various facilities adopted by major central banks over the course of the financial market crisis. the actions taken by the federal reserve and the bank of england are largely in line with the economic literature of how central banks can further ease the monetary policy stance when faced with the zero lower bound. see, for example, krugman ( 1998 ), svensson ( 2000 ) and bernanke et al. ( 2004 ). svensson ( 1997 ) presents a simple but instructive model of the conduct of monetary policy. bis central bankers ’ speeches the goals, information variables and tools central banks use – evolve? what changes to the framework are most likely to be adopted? will inflation objectives be increased to allow central banks more leeway to cut interest rates if another shock occurs? how will financial stability considerations be integrated in the monetary policy process? the questions are many. monetary policy might change for at least three reasons. first, the economic environment in which it is set has changed dramatically. most notably, public debts have increased sharply since 2007 and sovereign risk premiums are in some cases large. as a consequence, interactions between fiscal and monetary policy have grown stronger. furthermore, financial systems in some countries, in particular those that experienced large housing bubbles such as ireland, have become impaired, limiting the effectiveness of the transmission mechanism. while central banks potentially may respond simply by adjusting policy by more than they would otherwise do, it raises the question whether other policy tools, such as asset purchases, can be used to support aggregate demand. finally, unemployment rates have risen sharply and risk putting central banks under strong pressure to pursue expansionary policies. public debts, the state of the financial system and the level of unemployment change only slowly over time, so there are good reasons to believe that these changes will impact on monetary policy for many years to come. a second reason why monetary policy may change stems from the adoption of unconventional policy instruments during the crisis. for instance, central banks introduced additional liquidity facilities to address funding stress in various markets, engaged in

financial markets variables as information variables for monetary policy purposes has also become more complicated. while interest rate spreads have been used by many central banks as measures of financial market participants ’ growth and inflation expectations and as indicators of the likelihood of recessions, reduced liquidity and large risk premiums in many markets now make their interpretation more complicated. this makes it more difficult for central banks to judge whether the current stance of monetary policy is appropriate. bernanke ( 2012 ) discusses the federal reserve ’ s recent experience with unconventional policy instruments. conversely, bis ( 2012 ) highlights the dangers to the financial system of maintaining very accommodative monetary policy for an extended period of time. bis central bankers ’ speeches 3. the framework of monetary policy next i turn to the question of how monetary policy frameworks might evolve as a consequence of the crisis. the framework, or strategy, is normally viewed as consisting of four components : the goal ( s ) of monetary policy ; any intermediate targets that are used ; information or indicator variables ; and monetary policy instruments. 3. 1 the objectives of monetary policy price stability is the overriding objective of monetary policy in most advanced economies, although central banks frequently, if not typically, have a secondary objective of smoothing the business cycle. precisely how the price stability objective is pursued varies, but in many cases a numerical definition of price stability or an explicit inflation target plays a key role. indeed, both the federal reserve and the bank of japan, which have neither, have recently communicated what inflation rates they consider to be consistent with their mandates. there is much agreement that price stability should remain the overriding goal of monetary policy. this reflects the view that the financial crisis was not principally caused by monetary policy but rather by weaknesses in the financial system. 15 furthermore, high inflation is costly and there is no exploitable trade - off between inflation and growth. moreover, price stability, while neither necessary nor sufficient for achieving financial stability, is conducive to that end ( imf 2010 ). nevertheless, important questions concerning the framework remain. one of these concerns is whether financial stability should be a separate goal of monetary policy, which i discuss in the next section. another broad question concerns whether the design of inflation objectives should be reconsidered. blanchard et al. ( 2010 ) suggest that there are reasons to consider aiming for higher inflation than most central banks did before the crisis. suppose that the central bank ’ s inflation objective is 2 per cent, that the equilibrium real interest