indeed significant benefits. 2 policies characterized by commitment have been shown to lead to more economic stability – lower and less volatile inflation and less volatile output. in fact, the mainstream theoretical finn e. kydland and edward c. prescott, “ rules rather than discretion : the inconsistency of optimal plans, ” journal of political economy, 85 ( june 1977 ), pp. 473 – 91. for an excellent overview, see richard clarida, jordi gali, and mark gertler, “ the science of monetary policy, ” journal of economic literature ( december 1999 ), pp. 1661 – 1707. bis central bankers ’ speeches models that we use for monetary and macroeconomic analysis are built on the notion that monetary policy is conducted in a rule - like manner. the practice the practice part of the session title has proven to be a bit more elusive. the science of monetary policy has not progressed to the point where we can specify the optimal rule for setting monetary policy. the reason is that optimal rules, that is, those that maximize economic welfare, are highly dependent on the particular model from which they are derived, and there is no broad - based consensus for the right model. more relevant is the finding that the optimal rule for one model can produce very bad outcomes in another model. in addition, optimal rules can often be quite complex, thus making them difficult to implement and to communicate to the public. in other words, they may not be very transparent. however, these limitations to implementing optimal policy rules should not deter us from efforts to adopt a more systematic rule - like approach to the conduct of policy. there has been a great deal of progress made in identifying simple rules that appear to perform well in a variety of models and environments. such robust rules can form a basis for developing more systematic, rule - like policymaking. one important and desirable characteristic of a systematic and rule - like approach to policy relates to communication. in particular, it is an approach that is easily communicated to the public and thus greatly improves the transparency and predictability of monetary policy, which reduces surprises. the public and markets are more informed about the course of monetary policy because they understand how policymakers are likely to react to changing economic circumstances. equally important in my view is that greater clarity about the policymakers ’ reaction function strengthens accountability and thus can serve to preserve the central bank ’ s independence. the most well - known simple rule, of course, is the one proposed by john taylor in

##ity crises can jeopardise price stability over the medium term. the lender - of - last - resort function of central banks is the classic solution to the run problem for individual banks. the central bank stands ready to provide liquidity to the distressed bank at a penalty rate against adequate collateral. a credible lender - of - last - resort function can ensure that no solvent financial institution ever faces a bank run. depositors know that even if all the other depositors withdraw their funds, the liquidity needs of a solvent bank will be met by the central bank. as a result, bank runs never happen in the first place. a similar form of liquidity insurance against adequate collateral can also be useful in the case of runs to the whole banking system. a central bank commitment to provide liquidity insurance in the future alleviates expected future funding constraints, thus reducing funding risk and eliminating the possibility of systemic bank runs. the progressive lengthening of the maturity of ecb liquidity - providing operations – from six months in early 2008 to twelve months in late 2009, and to three years at the end of 2011 – can be viewed as a form of commitment to guarantee the availability of ample liquidity over a future period of time. i would argue that providing secured financing with a three - year maturity in our vltros at the end of 2011 and at the beginning of 2012 was a successful example of system - wide liquidity insurance for banks. the vltros successfully lowered interbank tensions, as shown by a steady reduction of the spread between the unsecured euribor interbank rate and the ois swap rate over the following months. standard bank lending surveys and ad hoc surveys asking banks specifically about the effectiveness of the two vltros provide further evidence that the programmes have helped to make banks ’ credit standards less tight towards both households and non - financial corporations. 6 all in all, by removing the prospects of future liquidity constraints on credit supply, this policy has avoided a major credit crunch. without the launch of the two vltros, banks in distressed regions may have been forced into a self - reinforcing fire sale of their assets, could have defaulted on their maturing obligations, or may have discontinued and withdrawn existing credit lines to companies. the ensuing restricted credit supply could have dragged the whole euro area economy further into recession and could have even led to deflationary risks. more specifically, the vltros have helped tackle financial fragmentation. recourse to these