to absorb shocks smoothly was supported by more predictable and transparent monetary policies in many countries. stable and low inflation helped to reduce the financial system ’ s sensitivity to shocks. second, for this reason, they have to monitor closely the process of financial innovation. different approaches, involving both the public and the private sector, should be combined to enhance transparency, such as ( i ) the improvement of financial standards and supervisory regulation, ( ii ) an improvement of data reporting on otc markets ( bonds, derivatives ), ( iii ) efforts to foster better disclosure from financial institutions, ( iv ) promotion of stronger market discipline. it is my strong belief that this can be done without impeding the efficiency and agility of modern finance, which is so important for our growth and future prosperity. o. cousseran and i. rahmouni ( 2005 ) “ the cdo market - functioning and implications in terms of financial stability ”, financial stability review n°6, banque de france.

been submitted. most of the time even parliamentary countries will wait for the next budget cycle to incorporate new discretionary fiscal policies. the second lag is what is known as the outside lag — the time between the action being taken and an observable impact on the real economy. for monetary policy this lag was formerly thought to be long — on the order of nine months to a year in most developed countries. monetary policy has traditionally operated through changes in short term interest rates, which then change long term rates with some lag, and real spending with some further lag. but there are reasons why this lag may have speeded up in recent years — credit markets have now become more forward - looking and asset values have a sizeable and relatively quick impact on spending through the wealth effect. for fiscal policy, tax changes that alter withholding probably operate within a quarter or two, though those that raise spending such as for construction can take many years to plan routes, purchase land, let contracts and the like. the upshot of all of this is that it does seem possible to use monetary policy as an effective stabilization instrument. because of its relatively short inside lag and possibly reduced outside lag, monetary actions are likely to have some effects within a half - year of the recognition of the need for a change, perhaps even faster when authorities act on the basis of forecasts. but what is possible for monetary policy seems basically impossible for discretionary fiscal policy. when the extra year - long piece of the inside lag is added on, it is hard to escape the conclusion that fiscal policy should be used for stabilization purposes only in the deepest and longest of recessions. if an economy has flexible exchange rates, no harm is done by this conclusion, because the economics of flexible exchange rates suggest that monetary policy is best used for stabilization and fiscal policy for long - term policies in any case. if the economy operates under fixed exchange rates, the lesson here is that discretionary fiscal policy should generally only be used to deal with long run needs. the only operative stabilization force in these economies is then the automatic fiscal stabilizers — indeed, this suggests a potential problem for countries on fixed exchange rates. fiscal policy in the united states turning now from the general to the specific, i examine these issues in more detail for the united states. the first point to make is that for nearly three decades the u. s. has operated under flexible exchange rates. neither the federal reserve nor the treasury typically intervene