asset price increases - as so often in the past. although there is little evidence to date of a general lowering of credit standards, credit growth has been very rapid and loans to finance equity purchases have risen sharply in some countries. ensuring that investors are not sheltered from the consequences of their sometimes misguided investments is important for maintaining prudent lending standards. it is important that the message from central banks is clear : investors should not count on monetary policy underwriting any particular valuation of equity markets. a second and related risk is that high asset prices might lead to complacency about debt levels. household and corporate balance sheets may look healthy when asset prices are stable or increasing, but what if prices fall? similarly, debt servicing ratios for some emerging market countries may look sustainable when market access is improving, but what will happen if interest rates rise? rising levels of household and corporate indebtedness in some industrial countries, as well as rising levels of external indebtedness in a number of emerging market countries, are based on expectations of continued strong growth in income and production. earlier i remarked that the momentum of the world economy and the policy actions taken to date give reason for optimism. however, volatility is intrinsic to financial markets. our experience during the 1990 ’ s clearly demonstrates the danger of basing decisions solely on a single central scenario, rather than on a range of possible - including worst case - scenarios. monetary policy and structural changes let me now briefly touch upon the question of how monetary policy should react to structural changes in the economy? quite a lot of thinking has already been done on this issue, both among academics and policymakers. nevertheless, i believe that more must be done in this field, especially since at least some parts of the world economy have seen something of a productivity shock in recent years. i am deliberately avoiding the buzzword “ new economy ” here, since history has been full of expressions like that ever since the turn of the 19th century. the discussion about monetary policy and a productivity shock is taking place mostly in the united states, in the light of the impressive economic performance there and the acceleration in the rate of productivity growth. so one could certainly ask : what about the rest of the world? the possibility of a productivity breakthrough also in other parts of the world cannot of course be ruled out. higher - or accelerating - productivity growth does indeed pose new challenges for monetary policy. it could set in motion a complex of effects on aggregate supply and demand, on

maximum stability in output could, on the other hand, result in sharp fluctuations in the rate of inflation and erode the credibility of the monetary regime. a point somewhere midway between the two extremes must therefore be found. let me also stress the importance of central bank independence. in order to be successful with the implementation of an inflation target approach, the central bank must be able to act independently of day - to - day party politics and to set interest rates continuously according to the specified inflation target. otherwise a credibility problem arises because it will be hard for policymakers to convince the general public of monetary policy ’ s long - term nature. lack of credibility, in turn, means that the central bank has to set its interest rates higher than otherwise would have been the case. looking ahead, i believe there are at least two major questions that central banks have to address more thoroughly. first, how should monetary policy react to asset prices, such as equity and / or real estate prices? we know from history that the development of asset prices can have a significant impact on both inflation and real economic activity. we need to establish whether or not there are actions that central banks can and should take to minimise the likelihood of macroeconomic instability arising from extreme fluctuations in asset prices. second, how should monetary policy react to structural changes in the economy? monetary policy and asset prices let me start with the question of monetary policy ’ s response to movements in asset prices. this depends in turn on how the central bank chooses to use the information contained in asset prices. in a regime that explicitly targets inflation, asset prices are taken into account via the effects on aggregate demand. rising share prices increase household wealth and that would raise consumption for a given level of income if these increments to wealth are considered to be of a permanent nature. at the same time, consumer confidence boosted by higher share prices could potentially make individuals more prone to spend their increased wealth. an increase in share prices also makes investment more attractive to firms since it increases collateral values and lowers the cost of new capital relative to existing capital. if share prices predict higher expected output growth, this could also lead to more investment. if the asset prices on which households and firms base their consumption and investment decisions prove to be too optimistic, this would create inflationary pressure in the short term. an important question in this context is how sensitive households ’ and firms ’ consumption and investment responses are to changes in asset prices. via the effects on inflation, asset prices are thus taken