financial vulnerabilities. financial shocks are costly because their effects can be too rapid for policy easily to offset, and because they hit potential supply so creating a trade - off between output and inflation. in other words, the taylor frontier is less favourable ( further from the origin ), when account is taken of financial shocks, than we might have believed. taking the entire period of inflation targeting – including the recent past – might give a more accurate indication of where this “ minsky - taylor ” frontier lies than using data for the great stability period alone ( chart 4 ). what implications does this have for monetary policy? possibly none – if we can rely now on macroprudential tools to ensure financial sector resilience. but set those tools to one side for a moment. monetary policy could be used to reach a point more like p in chart 5, with less variation in the output gap and more variation in inflation than we have actually experienced over the past 20 years. put another way, higher interest rates in the run up to the financial crisis might have reduced the impact of the subsequent bust, at the cost of below - target inflation and below - trend output before the crisis hit. 2 in practice new macroprudential tools and better micro - prudential supervision will improve the possibilities available to monetary policymakers. having additional instruments in effect brings about a favourable shift in the minsky - taylor frontier ( or surface ) which defines the possibilities open to policymakers. 3 nevertheless, consistent with the new remit4 given to the monetary policy committee by the uk government last month, the experience of recent years suggests that there may be a more detailed appraisal of this argument is contained in “ twenty years of inflation targeting ”, a speech by mervyn king ( 2012 ), available at http : / / www. bankofengland. co. uk / publications / pages / speeches / 2012 / 606. aspx. a social planner would use both instruments together to pick the welfare maximising point on the frontier / surface, and in the uk the monetary policy committee is expected to work closely with the financial policy committee which has the statutory power to deploy macro - prudential instruments. the relevant passage in the monetary policy committee ’ s remit states : “ circumstances may also arise in which attempts to keep inflation at the inflation target could exacerbate the development of imbalances that the financial policy committee may judge to represent a potential risk to financial stability.

will cover six areas : 1 ) supervision of banks ; 2 ) harmonisation of legislation in line with the acquis communautaire under the competence of the nbs ; 3 ) liberalisation of capital movements ; 4 ) conduct of monetary policy and foreign exchange rate regime ; 5 ) monetary, financial and balance of payments statistics ; and 6 ) financial services consumer protection. there will be a need to coordinate these efforts, and to produce a coherent picture of the different recommendations. this will be the main task of mr thijs kettenis, policy advisor at de nederlandsche bank, who will be our resident programme coordinator here in belgrade. he is here today, and i would like to wish him full success in this undertaking. the analysis will be carried out by the ecb together with colleagues from the national central banks of belgium, bulgaria, the czech republic, denmark, germany, estonia, greece, france, italy, cyprus, latvia, hungary, the netherlands, austria, poland, romania and the united kingdom. it is a long list of countries, but i felt it was absolutely necessary to mention all of them. i would like to warmly greet the representatives from several of these participating central banks, who have accompanied me here today. of course, the work which confronts all of us in the coming years goes beyond setting benchmarks and recommending solutions in these six areas. we are today marking the start of a strong strategic partnership between our central banks, through which we intend to support and add to the achievements already attained by the nbs up until now. we will be building this strategic partnership on strong foundations. many of our central banks have already established an intensive dialogue with the monetary authorities of serbia – and in some cases this began several years ago. if i may for one moment refer to my personal experience at the oesterreichische nationalbank – before i took up the position in the ecb executive board in 2003 – i would like to recall how intense the cooperation was with the monetary authorities of all our neighbours. the same is true for many of the other central banks involved in this programme. i am sure that we will find you highly motivated partners. on our side, you will find both commitment and enthusiasm. i would like to wish all involved parties the very best of luck.