ben s bernanke : the effects of the great recession on central bank doctrine and practice speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at the federal reserve bank of boston 56th economic conference, boston, massachusetts, 18 october 2011. * * * the financial crisis of 2008 and 2009, together with the associated deep recession, was a historic event – historic in the sense that its severity and economic consequences were enormous, but also in the sense that, as the papers at this conference document, the crisis seems certain to have profound and long - lasting effects on our economy, our society, and our politics. more subtle, but of possibly great importance in the long run, will be the effects of the crisis on intellectual frameworks, including the ways in which economists analyze macroeconomic and financial phenomena. in particular, the crisis has already influenced the theory and practice of modern central banking and no doubt will continue to do so. although it is too early to know the full implications of recent events for central bank doctrine and operations, i thought it would be worthwhile today to highlight and put into context some of the changes, as well as the continuities, that are already evident. my remarks will focus on how central banks responded to recent challenges related to the conduct of both monetary policy and the promotion of financial stability and how, as a result of that experience, the analysis and execution of these two key functions may change. the monetary policy framework during the two decades preceding the crisis, central bankers and academics achieved a substantial degree of consensus on the intellectual and institutional framework for monetary policy. this consensus policy framework was characterized by a strong commitment to medium - term price stability and a high degree of transparency about central banks ’ policy objectives and economic forecasts. the adoption of this approach helped central banks anchor longer - term inflation expectations, which in turn increased the effective scope of monetary policy to stabilize output and employment in the short run. this broad framework is often called flexible inflation targeting, as it combines commitment to a medium - run inflation objective with the flexibility to respond to economic shocks as needed to moderate deviations of output from its potential, or “ full employment ”, level. the combination of short - run policy flexibility with the discipline imposed by the medium - term inflation target has also been characterized as a framework of “ constrained discretion ”. many central banks in both advanced and emerging market economies consider themselves to be inflation targeters, prominent examples including those in

a subsidiary of the bank and the creation of a separate financial policy committee within the bank that will identify, monitor, and take action to reduce systemic risks. in the euro area, the newly created european systemic risk board, which is chaired by the president of the ecb and includes the governors of all european union central banks, draws heavily on central bank expertise, including analytical, statistical, and administrative support from the ecb. in the united states, the federal reserve has reoriented its existing supervisory activities to incorporate a broader systemic focus ; it also has been assigned new responsibilities for financial stability, including supervisory authority over nonbank financial institutions that are designated as systemically important by the financial stability oversight council and new backup authorities for systemically critical financial market utilities. the integration of monetary policy and financial stability policies as i noted earlier, in the decades prior to the crisis, monetary policy had come to be viewed as the principal function of central banks ; their role in preserving financial stability was not ignored, but it was downplayed to some extent. the financial crisis has changed all that. policies to enhance financial stability and monetary policy are now seen as co - equal responsibilities of central banks. how should these two critical functions fit together? at an institutional level, as i have already suggested, the two functions are highly complementary. monetary policy, financial supervision, and lender - of - last - resort policies all benefit from the sharing of information and expertise. at the federal reserve, for example, macroeconomists help design stress - test scenarios used by bank supervisors, while supervisors provide information about credit conditions to macroeconomic forecasters. bis central bankers ’ speeches threats to financial stability, and their potential implications for the economy, are thoroughly discussed at meetings of the fomc. an important debate for the future concerns the extent to which it is useful for central banks to try to make a clear distinction between their monetary and financial stability responsibilities, including designating a separate set of policy tools for each objective. for example, throughout the crisis the ecb has maintained its “ separation principle ” under which it orients changes in its policy interest rate toward achieving price stability and focuses its unconventional liquidity and balance sheet measures toward addressing dysfunctional markets. the idea that policy is more effective when separate tools are dedicated to separate objectives is consistent with the principle known to economists as the tinbergen rule. 7 in practice, the distinction between macroeconomic and financial stability objectives will always be blurred to some extent, given