central banks with access to micro information of individual financial institutions which enables them to effectively monitor both economic and financial conditions, are in the best position to detect such imbalances and certainly need to consider what policy actions they can take. a second argument would be that imbalances such as excess leverage would be best dealt with through supervisory and regulatory measures. the use of micro - prudential tools is certainly called for. but that does not rule out the use of monetary policy. in the japanese experience, when the bank of japan used to conduct window guidance many years ago, there was also the academic debate on whether it alone can be effective in curtailing excessive bank lending. the conclusion was that in a very loose monetary environment, arbitrage behavior would weaken the effects of window guidance. on the other hand, monetary policy on its own could not complete the job. it would become more effective when monetary policy and micro - prudential policies are used in a complimentary fashion. 3 challenges in leaning against the wind i do acknowledge that there are also challenges even if we were to agree that central banks should lean against the wind. what conditions need to be fulfilled so that the central bank can effectively lean against the wind? certainly the central bank will need to be independent in making its assessment that unsustainable imbalances are building up in the economy and that it may be necessary to take away the punch bowl in the midst of the party. however, formal independence would not be sufficient. 4 a broad social consensus would be necessary. there would need to be an see also shirakawa ( 2010a ). what responsibility a central bank should bear in democratic society is discussed in shirakawa ( 2010b ). understanding that if financial imbalances were allowed to build - up, for example through a rise in asset prices and increase in leverage, the social and economic cost of its collapse would be substantial, and thus pre - emptive policy measures to cool such actions would be appropriate and necessary. without such a broad consensus, it would be quite difficult for the central bank or any other public authority to embark on policy measures to take away the punch bowl, which will be quite unpopular in the short run. another challenge would be how to frame monetary policy, especially in the public policy debate. the importance of the framing effect should not be underestimated. the phrase “ inflation targeting ” has had both a positive and negative effect on the public understanding of monetary policy and as a result

development and the economic policy research council which we will hear later on in this workshop, i would like to take a few minutes of your time to explain why i believe that monetary union in east africa will make an important contribution to the long term development of our region, potentially helping to accelerate the transition of our economies to middle income status, and also to identify the critical prerequisites for the successful introduction of eamu. why is monetary union important in east africa? the partner states of the eac are implementing a customs union and a common market in order to promote regional economic integration. deeper regional economic integration will provide a major spur to development in all partner states by strengthening competition within our respective domestic markets, by allowing producers to reap greater economies of scale and thus become more efficient, and by widening opportunities for trade. the regional market will also provide a stepping stone for domestic producers to access global markets. bis central bankers ’ speeches the primary rationale for the monetary union is to cement the benefits of regional economic integration. replacing individual currencies with one single common currency will reduce the costs and risks of transacting business across the national boundaries of the partner states of the eac. monetary union removes the costs of having to transact in different currencies and the risk of adverse exchange rate movements for trade within east africa. furthermore, because the combined economy of all of the partner states together will be more diversified than that of any individual partner state, it will be less vulnerable to external shocks such as commodity price shocks and as a consequence, the volatility of the common exchange rate against that of other major currencies such as the dollar or euro should be less than the volatility of the currently existing national currencies of the partner states. exchange rate volatility is a major risk for business and a deterrent to private investment, especially in the traded goods sectors of the economy. hence by eliminating entirely exchange rate movements within the eac, and by reducing exchange rate volatility with respect to third party currencies outside of the eac, the eamu should reduce some of the commercial risks of doing business in east africa and, as such, help to promote more private investment. eamu will also be important for the future of east africa because of the signal it sends to the rest of the world. having a common currency is one of the clearest statements of intent that the eac can make to demonstrate its long term commitment to deep regional integration