chair of the advisory technical committee ( atc ) of the esrb ; and the following members without voting rights : one high - level representative per member state of the competent national supervisory authorities ( the respective high - level representatives shall rotate depending on the item discussed, unless the national supervisory authorities of a particular member state have agreed on a common representative ), and the president of the economic and financial committee ( efc ) of the ecofin, which is the only representative of finance ministries. see, for example, bernanke and gertler ( 1995 ) and the response by cecchetti et al ( 2000 ). bis central bankers ’ speeches this view implied a strict separation between monetary policy and financial stability policy. central banks had been well aware of the importance of financial stability for the smooth conduct of monetary policy and of their varied responsibilities in ensuring financial stability on the other hand. yet, the importance of the possible implications of financial imbalances were underestimated and not systematically integrated in the analytical apparatus supporting monetary policy. this flaw in the intellectual underpinning misled central banks to downplay their financial stability functions and supported the general view that monetary and microprudential policy can be conducted separately, with monetary policy instruments geared towards achieving macroeconomic stability, and financial regulation and supervision aimed at preserving financial stability in the spirit of tinbergen ’ s policy assignment rule. 5 however, it has become clear by now that this strictly dichotomous view is flawed since monetary policy and financial stability policy are intrinsically linked to each other, given the powerful interactions between financial and economic conditions. as the recent crisis forcefully demonstrated, the previous mainly microprudential orientation of financial regulation and supervision proved unable to curb the tendency of the ever more complex and opaque financial system to generate excessive amounts of systemic risk. the unravelling of the associated financial imbalances brought about the biggest financial and economic disaster since wwii which, in turn, severely impacted on the conduct of monetary policy. as the monetary policy transmission mechanisms were affected, central banks had to take unconventional measures. the crisis also taught us that “ cleaning ” rather than “ leaning ” against financial imbalances can simply become too costly to be ignored ex ante. in addition, we also learned not to underestimate the moral hazard associated with the asymmetry in the previous consensus view of monetary policy. in the light of the obvious breakdown of the jackson hole consensus, the view has become more popular that under certain circumstances

of the index of industrial product ( iip ) of the advanced economies and india has risen to 0. 50 during the period 1991 – 2009 from 0. 20 in during the period 1971 – 1990 ( chart 1 ). see dr. d. subbarao ( 2008 ), “ mitigating spillovers and contagion – lessons from the global financial crisis ”, speech delivered at the rbi - bis seminar at hyderabad on december 4, 2008. chart 1 : business cycle of advanced economies and india : 1991 to 2009 0. 06 cyclical industrial production of india cyclical industrial production of advanced economies 0. 04 0. 02 - 0. 02 - 0. 04 2009m01 2008m04 2007m07 2006m10 2006m01 2005m04 2004m07 2003m10 2003m01 2002m04 2001m07 2000m10 2000m01 1999m04 1998m07 1997m10 1997m01 1996m04 1995m07 1994m10 1994m01 1993m04 1992m07 1991m10 1991m01 - 0. 06 12. the traditional conduit of transmission of global shocks is trade cycles. the cyclical movement in india ’ s exports and world imports during the earlier period 1970 – 91 was not significantly synchronised with a relatively low correlation of 0. 38. however, with rising exports along with a transition from primary article exports to manufacturing exports, the correlation between india ’ s exports and world imports has increased significantly to 0. 80 during the recent period 1992 – 2009 ( chart 2 ). chart 2 : trade cycle of advanced economies and india : 1992 to 2009 0. 25 0. 2 0. 15 impworldcy expincy 0. 1 0. 05 - 0. 05 - 0. 1 - 0. 15 - 0. 2 - 0. 25 1992m01 1992m08 1993m03 1993m10 1994m05 1994m12 1995m07 1996m02 1996m09 1997m04 1997m11 1998m06 1999m01 1999m08 2000m03 2000m10 2001m05 2001m12 2002m07 2003m02 2003m09 2004m04 2004m11 2005m06 2006m01 2006m08 2007m03 2007m10 2008m05 2008m12 - 0. 3 13. besides the synchronisation