critical to controlling expectations. from an operational perspective, a world characterized by imperfect information and learning increases the value of transparent communication about the objectives of policy, reinforced by a precise quantitative definition of price stability as well as clarity about the way those objectives are systematically pursued. however, there is no better way to establish a reputation than letting the public itself infer and recognise the true monetary policy objectives from the central bank ’ s repeated behaviour. a central bank systematically looking forward – and never pausing to reflect on its past record and the way this might be perceived by its public – might expose itself to the risk that past deviations of inflation from the medium term objective, by compounding over time, might endanger credibility and thus undermine the very foundations of the monetary institutions in place. the ecb ’ s monetary policy strategy, with the primacy that it assigns to price stability, forces policymakers to systematically pause and reflect, not only on the future design of policy, but also on past achievements. as i said, the past is a standing guide to orient expectations and is an instrument to maintain credibility. for example, our strategy directs us to the following prescription : repeated and one - sided adverse shocks which directly affect the inflation rate and may not require, if taken individually, any specific policy adjustment, could very - well become destabilising, should private agents start doubting on the commitment of the monetary authority to maintain low and stable inflation and should expectations become disoriented. however, this encouragement to look in both directions, which we receive from our mandate, has to be reconciled with a further principle, our medium - term orientation, which advises against excessive fine - tuning of macroeconomic variables, including inflation. we consider fine - tuning an extremely risky strategy for a central bank. whether it might be predicated on present or past shocks makes, in the end, little difference. this conference suggests that, overall, a regime incorporating some degree of “ history dependence ” – as the literature labels central banks ’ concern for their past track records – can be associated with sizeable gains in terms of macroeconomic stabilisation. these findings are interesting and stimulating. but the risks of fine - tuning which might be implicit in a dogmatic approach to “ history dependence ” should not be understated. how best to combine and temper the bidirectional perspective – “ look at the future, do not loose sight of the past ” – with the need to maintain a high level of credibility, appropriately

ex ante excess of forced savings in the global economy. a second factor, closely correlated to the innovation in financial markets, has been the very powerful process of leveraging that has characterised global financial institutions in all different constituencies. this has included regulated and listed commercial and investment banks, private equity firms, hedge funds and all types of highly leveraged entities. under appreciation of the quantity of risk in addition to the underpricing of the unit of risk, also the sheer quantitative accumulation of risk was underestimated, at the level of institutions as well as at the level of the system. it is still debated to which degree the “ great moderation ” that had started in the mid - 1980s and was observed until the middle of last year, and that consisted of a remarkable reduction of volatilities in the real economy, has influenced the overall assessment of the quantity of see in particular r. j. caballero and a. krishnamurthy, “ collective risk management in a flight to quality episode ”, journal of finance, october 2008. see m. o ’ hara, “ liquidity and financial market stability ”, national bank of belgium wp no 55, may 2004. risk in a large array of asset markets during this period. the correlation between the reduction of volatilities and the magnitude of risk taking is there, but the direction and even the existence of a possible causality, remains an open question. 10 amongst other factors there was also a considerable lack of transparency about the allocation of risks across financial intermediaries, in particular in new and often highly leveraged, players. the nature of the business of certain financial intermediaries relied almost exclusively on the roll - over of short - term debt to finance longer - term assets. the ability of these players to stand the consequences of a significant market correction turned out to be greatly overstated. to make things worse, these consequences were intensified by the high leverage and the parcelling of risk. when the crisis occurred, the general loss of confidence and the large number of linkages among financial institutions resulted in a quick and powerful transmission of “ fears ”. 11 iv. main factors to be addressed let me now look ahead to long - term solutions, which in my view need to start by addressing three important factors. first, there has been considerable short - termism, i. e. an excessive focus on near - term returns. modern financial systems have favoured instruments and intermediaries that promise large returns in the