in the regime i just described, the answer to this question is pretty simple : anything affecting inflation over a two - year horizon. variables such as inflation expectations, wages, output, unemployment, the exchange rate, commodity prices, and so on, have important effects on inflationary forecasts and must be taken into account when deciding the future path of monetary policy. however, it is also important that investors, wage and price setters understand and share the importance of these variables for the inflation process. communication is essential, and that is the role of monetary policy or inflation reports, monetary policy statements, minutes, projections, speeches, and so forth. a key question during the financial crisis was to which extent central banks should react to asset prices, such as housing or stocks prices. the answer from the perspective of inflation target should be : as long as they affect the forecast of inflation, they should be considered in the reaction function of monetary policy. asset price bubbles or distortions that may threaten financial stability should be considered when evaluating financial vulnerabilities, but not influence monetary policy if they do not have an impact on inflation. it is not clear that an increase in interest rates will be capable of stopping an increase in asset prices. the required adjustments might be so large that they could end up unnecessarily generating high unemployment and an undesired drop in inflation. under inflation targeting, any interest rate movements that is inconsistent with inflation converging to the target may undermine the credibility of monetary policy, destabilizing inflationary expectations and weakening the effectiveness of monetary policy. using monetary policy to burst a bubble in asset prices is particularly complicated in emerging market economies, since bubbles in domestic assets generally take the form of an exchange rate appreciation caused by large capital inflows. tightening monetary policy to burst the bubble may have perverse effects, since it induces further capital inflows and strengthens the currency. in this case, the interest rate is not the appropriate instrument. exchange rate intervention could be a better policy tool. bis central bankers ’ speeches bringing back financial stability to central banking with the global financial crisis, there was a renewed discussion on the role of central banks in securing financial stability. this is not new. the first central banks ( sweden and the uk ) were created in the 17th century, but no proper role for central banks was established, and indeed the bank of england was founded to finance the war with france in the late 17th century ( davies and green, 2010 )

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