outflows of capital. some of them will have to undertake structural reforms and consolidate their public finances. this brings us to the second challenge : developments in public finances. this topic is relevant for the us – just think of the government shutdown and the risk of eventually reaching the debt ceiling –, it is relevant for japan and it is certainly relevant for the euro area. ultimately, high government debt impedes economic growth and endangers financial stability. bis central bankers ’ speeches the third challenge is the dampened outlook for emerging market economies. this will shift the global pattern of growth toward advanced economies and will require emerging markets to adjust. 4. regulatory reform now, we have talked about the global economic outlook and we have talked about challenges for economic policy. this leaves us with the third topic that will be relevant for this year ’ s annual meeting : institutional reform. let us take a closer look at the reform of financial regulation. here, we have already made good progress. we have, for instance, agreed upon new capital requirements for banks. these will make banks more resilient against shocks, thereby enhancing financial stability. but we have not reached the end of the reform process. two topics are currently of interest. the first is the issue of shadow banking. shadow banking refers to financial institutions that operate outside the perimeter of traditional banking regulation. we might also use the term “ non - bank banks ”. money market funds or hedge funds are typical examples. as these entities might be a source of systemic risk we have to deal with them in terms of regulation. this issue has already been discussed at the g20 summit in st. petersburg in august. progress has been made and shadow banking will remain high on the reform agenda. the same is true of the “ too big to fail ” problem. this refers to banks which are so big that their failure could bring down the entire financial system. just think about what happened when lehman brothers failed in september 2008. what we need are restructuring mechanisms that will allow such banks to fail without disrupting the whole system. at the conceptual level, we have already made good progress. now, we have to implement the new measures. 5. conclusion ladies and gentlemen, many issues will be discussed at this year ’ s annual meeting of the imf and the world bank. i have highlighted a few of them but left out others. in the context of the imf, there will certainly be debates on quotas and governance. at the same time, there

the price - resetting firm sets a higher price, as it anticipates that trend inflation is going to erode its relative price in the future. as a consequence, the relative importance of current marginal costs, and therefore of the output gap, decreases. thus, if the central bank raises the inflation target, the ( short - run ) new keynesian phillips curve flattens, and the inflation rate becomes less sensitive to variations in current output. or, to put it differently, for a given change of the inflation rate, the central bank has to change its policy rate correspondingly by more. it therefore loses some of the additional wiggle - room gained through the higher target. the relevance of this trade - off depends on assumptions regarding the price setting behaviour. according to jordi ’ s model, the optimal inflation target for the euro area is 1. 5 %. when parameter uncertainty is allowed for, the figure increases to 2. 2 %. and each fall of the natural rate of interest by one percentage point should lead to an increase of the inflation target by 0. 9 percentage point. in my opinion, contributions like jordi ’ s are particularly helpful as they provide a workable framework within which to weigh different trade - offs inherent in an economic policy decision. as with all models, the paper abstracts from certain aspects in order to zoom in on the interaction of a particular set of variables. in this case, i believe that some of the aspects not included in this model might shift the overall assessment of the benefits and cost of a higher inflation target significantly. the risk of de - anchoring inflation expectations seems particularly relevant in this regard. ben bernanke once put it like this : “ if we were to go to 4 % and say we ’ re going to 4 %, we would risk a lot of … hard - won credibility, because folks would say, well, if we go to 4 %, why not go to 6 %? it ’ d be very difficult to tie down expectations at 4 %. ” 16 as we describe in our most recent monthly report, which was published earlier this week, bernanke ’ s claim can be supported by a prototypical new keynesian framework with adaptive learning and a central bank following a simple taylor rule. here, a higher inflation target makes reaching a stable equilibrium more difficult. moreover, research by klaus adam and henning weber suggests that the optimal rate of inflation at the firm level has declined in the us over time, as