appropriate haircuts on collateral, and avoiding the purchase of risky private - sector assets. third, and important even when we move away from the zero lower bound, the expansion of central bank responsibilities to include macroprudential policy and, in the case of the bank of england, responsibility for regulating the banking system, has made independence much harder to define. the deployment of responsibilities outside monetary policy cannot be divorced from the government in the same way as is possible for monetary policy. for example, in the area of financial stability and banking supervision, there will be times when public funds may be put at risk when rescuing or resolving a failing institution – and that decision is properly one for the finance ministry. it is far from straightforward for a central bank governor to be completely independent in terms of monetary policy, somewhat independent in terms of financial stability, and not at all independent in terms of operations that risk taxpayers ’ money. the financial crisis has challenged our understanding of the objectives of monetary policy and exposed its limits. and, through the proliferation of instruments and resulting increase in responsibilities, it has complicated the question of central bank independence. so how should we respond to this more complex environment? we must keep sight of three important principles. first, although they should be realistic about what can be achieved, it is right that elected politicians and parliaments decide on the objectives of policy. second, as we learned in the 1970s, if the central bank is to achieve price stability – its fundamental role – it must be sufficiently independent. and third, in order to protect that independence, its limits should be very clearly circumscribed, and we should be exceptionally careful with decisions that put public funds at risk. the challenge remains, as it was twenty years ago, to make “ constrained discretion ” work in practice. but it has got harder. bis central bankers ’ speeches chart 1 : uk inflation and output gap variances inflation variance 1958 - 1992 1993 - 2007 output gap variance chart 2 : the uk ’ s pre - crisis trade - off? inflation variance stylised ‘ taylor frontier ’ 1958 - 1992 1993 - 2007 output gap variance bis central bankers ’ speeches chart 3 : the ‘ great stability ’ and crisis periods inflation variance 1958 - 1992 2008 - 2012 1993 - 2007 output gap variance chart 4 : the true trade - off for the uk over 20 years? inflation variance 1958 - 1992 1993 - 2012 2008 - 2012 1993 - 2007 output gap variance bis central bankers ’ speeches chart 5 : a preferable outcome?

that the squeeze on real household incomes will ease, providing some support for consumer spending. even so, real income growth will still only be moderate and high levels of indebtedness may weigh on the spending of some households. moreover, the uncertainties associated with the euro area are likely to persist, retarding growth there. not only will that weigh on our exports, but funding conditions may also remain difficult, while british businesses are likely to remain cautious about investing and hiring. at its october meeting, the monetary policy committee agreed that the outlook for uk output growth was markedly weaker than it had believed earlier in the year. without action, and despite the present excessive level of inflation, the extra margin of slack meant that inflation would consequently be more likely to undershoot, rather than overshoot, the 2 % target in the medium term. so it was against that background that we decided to re - start our asset purchases, buying another £75 billion of gilts. as you will no doubt know, quantitative easing aims to depress a range of longer - term yields and raise asset prices, so boosting demand. our analysis suggests that our first £200 billion of asset purchases reduced the yields on gilts and corporate bonds by around a percentage point2. studies for the united states, using a similar methodology, find comparable effects from the federal reserve ’ s large - scale asset purchases, which is comforting. the asset purchases also have the effect of boosting banks ’ holdings of the most liquid asset, central bank reserves, which may be of particular value at the current juncture. while one cannot be confident about the impact of our earlier purchases on the real economy, our analysis points to a peak effect on output of 1½ – 2 per cent and of ¾ – 1½ percentage points on inflation. at this juncture at least, we have no reason to believe that, suitably pro - rated, the current phase of purchases will be greatly different in their effect on either asset markets or on the real economy. for a summary of the evidence, including references to related studies, see michael joyce, matthew tong and robert woods ( 2011 ), “ the united kingdom ’ s quantitative easing policy : design, operation and impact ” bank of england quarterly bulletin, 51 ( 3 ), 200 – 212. bis central bankers ’ speeches several commentators have suggested that the effectiveness of quantitative easing could be enhanced by spending the newly created money on something other than government debt. conceptually, one can always think