be sensitive to when a marked appreciation in asset prices is becoming fuelled by rapid credit growth and looks likely to get the bank ’ s december 2003 financial stability review highlighted the revival in markets and the “ search for yield ” as “ spreads on high - yield and emerging market economy bonds … continued to narrow …, and estimate of the equity risk premium … declined. there has also been a sharp increase in inflow to hedge funds. market contacts describe some investors willing to take more credit, interest rate or exchange rate risk in order to increase returns in the short run. ”, pp. 13. see tucker p m w ( 2006 ), “ reflections on operating inflation targeting ”, a speech at the graduate school of business, university of chicago, may 2006. tucker ( 2009e ), op. cit. carried away beyond anything warranted by fundamentals. regulators need to be a bit less disposed to find fundamental explanations for any degree of financial appreciation, and a little more alert to market participants themselves saying, as many did, that risk is underpriced. that does not of itself mean that monetary policy should be more timid in trying to repair deficiencies in nominal demand. but it does underline the need, as i said a few years ago, to take care that the remedy for one set of imbalances does not lead to another. and this is especially important if, as would seem to be the case, monetary policy is capable of generating prolonged periods of stability at an aggregate level that lead financial market participants to believe mistakenly that the world is less risky than is actually the case. it is all very well saying that the cognitive biases of economists and the authorities should change slightly, and that our mindset should at times be a bit more lateral. but do we, in actual fact, have any instruments for doing anything about threats to stability from credit bubbles that are not associated with burgeoning nominal demand and inflationary pressures? that is precisely what the “ macroprudential instruments ” debate is about. there is increasing interest in these possibilities. the bank of england ’ s own november discussion paper was only one manifestation. another is the imf ’ s recent review of the macroeconomic policy framework. 11 the basic question is whether the authorities could lean against credit - fuelled booms by tightening capital or liquidity requirements for lenders or, as some economists have advocated, by raising the amount of collateral that borrowers have to put up. 12 in principle

is, of course, directed at a big deficiency of nominal demand in the economy. at our latest monthly meeting in early february, the mpc maintained bank rate at 0. 5 % and the stock of money injected via asset purchases at £200bn. the money market yield curve has edged down slightly since then. over the past year my colleagues on the mpc have variously set out the key mechanisms through which quantitative easing ( qe ) should work. i shall not go over all that ground today, but there is unavoidable uncertainty about the speed and potency of qe ’ s effects. i am minded to think that some of the effects will come through fairly gradually. and therefore i would stress that the monetary stimulus from qe has not stopped. the flow effect of our bond purchases on gilt yields is not the beginning and end of how qe provides monetary stimulus. plainly the mechanisms through which our money injections affect the economy differ in some respects from the transmission of changes in bank rate, which in an economy with a lot of ( net ) floating - rate debt can affect household and business borrowers ’ cash flows quickly. by imbalancing the asset portfolios of the institutional investors that sell us gilts, qe works in part through shifting the risk premia ( broadly defined ) on a wider class of financial assets. i would not expect that to be over and done with quickly. an analogy : it is sometimes alleged that the boom leading up to the crisis was in credit markets but did not really affect equity markets. i do not agree. arbitrage does connect markets – eventually. the boom in leveraged buy outs was precisely a mechanism for using underpriced debt to buy “ cheaper ” equity, which would have driven down the ex post equity risk premium had it taken its course uninterrupted by the crash. similarly now, the effects of imbalanced investment portfolios will, most likely, spread through different capital markets – and so into wealth and the availability and cost of capital – gradually. a second mechanism, rather less remarked – except perhaps in international central banking circles – is how qe here and the injection of money by other central banks effectively contribute to the financing of the banking system. by buying assets from the non bank private sector, we increase deposits with the banks : broad money. we also put extra reserves – balances with the bank – into the hands of the banks themselves. to the extent that those reserves