s responsibility for banking supervision would pass to a new institution - the financial services authority, or fsa - which would assume responsibility for the regulation and supervision of all financial institutions in the uk. this was widely seen as the price we had to pay for our enhanced monetary policy role. but at the same time the chancellor confirmed the bank ’ s continuing responsibility for the stability of the financial system as a whole, so that in fact what this has done - as in relation to monetary policy - is to distinguish and clarify the respective roles : of the bank, which now focuses upon systemic risk - and retains its lender of last resort role within parameters that are broadly defined by the legislation ; of the fsa which oversees both the prudential and business conduct of all individual financial institutions, including the banks, with the emphasis on consumer protection ; and the treasury, which has ultimate responsibility for both these dimensions. the new arrangements make a good deal of sense in the uk context where traditional distinctions between banks and other types of financial institution have progressively eroded and where there has been a general movement towards greater consumer protection across a much broader front. but at the same time as clarifying our respective responsibilities, and providing in each case for transparency and separate accountability for the way in which they are carried out, the new legislation recognises the vital importance of close coordination between them and establishes a framework for that. it is early days to assess the effectiveness of these arrangements, but my impression is that so far they are working well. governor jayawardena, there are many aspects of our new regime that i have not touched upon - including questions relating to our capital, our revenues, expenditure and allocation of profits and how they are reported and accounted for - which can also affect the degree of independence we enjoy. perhaps we might explore these together with the other issues in our discussion. but i hope i have said enough to draw a few conclusions. my starting point had been that central bank independence in the extreme sense of exemption from democratic control is unrealistic and inappropriate. yet wise governments in many countries around the world have recognised that they can gain advantage - in terms of public and market credibility from detached and unbiased advice in its field of competence from the central bank. the value that they put on the central bank ’ s role depends very much on the quality of that advice - the central bank ’ s objectivity and its technical expertise and professional competence. that is largely down to us. but the benefit a government derives from

is the “ sweet spot ” i referred to in the talk i gave about sterling earlier this year. i should emphasise that there ’ s nothing in this simple model that inhibits the response to this sweet spot. new investments are assumed to be costlessly reversible – firms can easily get out of them once productivity starts to decline – capital and labour can be easily moved from one sector to the other and there ’ s complete certainty about the timing and scale of that event. all this means that tradable output responds powerfully to the depreciation and, on the demand side, net trade and investment grow significantly. in reality, perhaps because there are significant frictions and uncertainties in the real world, the actual response of the tradable sector has been much more modest ( even though the fall in the exchange rate has been bigger than 10 % ). the impact of news about the future on the current economy is an area of active research for economists. see, for example, beaudry and portier ( 2006 ), kurmann and otrok ( 2013 ), and kamber, theodoridis and thoenissen ( 2017 ). the model used here is based on the model in di pace, king and theodoridis ( 2017 ). broadbent ( 2017 ). all speeches are available online at www. bankofengland. co. uk / speeches chart 9a : total factor productivity chart 9b : real exchange rate chart 9c : investment chart 9d : hours worked chart 9e : saving ratio chart 9f : consumption chart 9g : output chart 9h : inflation all speeches are available online at www. bankofengland. co. uk / speeches but there ’ s also a significant difference in the predicted behaviour of consumption, this time in the opposite direction. because they agree about the coming hit to income, households cut their spending immediately in this simulation – it falls 1½ % in the year after the news comes through – and the saving rate goes up. this dominates the sizeable response of net trade and investment, such that aggregate demand and output also decline. as a result the response of inflation is relatively muted. it still rises, thanks to the weaker exchange rate. but it does so by only 0. 5 % points, significantly less than we ’ ve seen over the past year or so. with output declining and inflation close to target it ’ s not clear the mpc would have wanted to raise interest rates.