to achieve price stability, the loss of monetary policy independence may not be very costly. in fact, for a small open economy, such as greece, it may actually provide net benefits. • second, it can be misleading to view the optimum - currency - area characteristics as preconditions for ensuring the success of a country ’ s participation in a monetary union. in particular, to view the characteristics as preconditions overlooks the fact that the characteristics, or criteria, can themselves be endogenous. i will argue that the creation of a monetary union can itself create conditions that are favourable to the well - functioning of the union. i. the loss of monetary policy independence to the ecb let me first turn to the matter of the loss of monetary independence. modern monetary theory emphasises the role of monetary policy in providing price stability. by so doing, monetary policy can best provide a stable environment, which is a prerequisite for growth. this view contrasts strongly with the view that monetary policy can be used for fine - tuning the economy. the intellectual underpinnings of the emphasis on price stability can be traced to milton friedman ’ s and ed phelps ’ critique of the phillips curve in the late 1960s. on a brief personal note, i was privileged to have been taught macroeconomics at lse by a w phillips. professor phillips was an excellent teacher who made contributions in many areas of macroeconomics. in fact, it is well known that milton friedman tried to recruit him to the university of chicago, but, fortunately for lse, he declined. the phillips curve expressed the idea of a trade - off between inflation and unemployment. the friedman - phelps insight, which helped earn those economists their respective nobel prizes, was that the trade - off was, at best, temporary. repeated attempts to reduce unemployment by allowing inflation to rise would result in ever - increasing inflation with unemployment returning to its natural rate. although the friedman - phelps hypothesis swept through academia in the 1970s, policy makers were slower to catch on. as a result, the 1970s, and in some cases the 1980s, provided a real - world laboratory for testing the friedman - phelps hypothesis. as we now know, central banks that kept trying to pin down the rate of unemployment wound up with both high inflation rates and high unemployment rates. this was a lesson that would not be lost on subsequent generations of central bankers. building on the friedman - phelps insight, finn kydland and ed prescott showed that a

supervision that constitutes the bulk of our ongoing engagement with the industry and through which our policy objectives are given effect. this division of labor is important for lawyers and policymakers to think about deeply because the processes of regulation and supervision are necessarily different in crucial respects. regulation establishes a binding public framework implementing relevant statutory imperatives. because a rule is designed to apply generally, rules must be based on general principles intended to achieve general aims, rather than reverse - engineered to generate specific effects for specific institutions. given their general applicability, there must be a general process for all those with an interest — industry, academics, citizens, congress — to have notice of, and opportunity to comment on all rules, ensuring that all potential effects and points of view are taken into account in the rule ’ s crafting. and given their general function, rules must be clear and public : those affected must know what to expect and what is expected. supervision, by contrast, implements the regulatory framework through close engagement with the particular facts about particular firms : their individual capital and liquidity positions, the diverse composition of their distinct portfolios of assets, their business strategies, the nature of their operations, the strengths and weaknesses of their management. much of the granular information used by supervisors is, accordingly, proprietary and confidential, and many of their judgments and decisions are closely tailored to specific circumstances. given the strong public interest in the safe, sound, and efficient operation of the financial industry 1 / 7 bis central bankers'speeches and the potential for hair - raising and widespread adverse social consequences of private misjudgment or misconduct in that industry, close and regular supervision of this sort can help us all sleep restfully. yet, the confidential and tailored nature of supervision sits uncomfortably with the responsibilities of government in a democracy. in the united states, we have a longstanding, well - articulated framework for ensuring that regulations conform with the principles of generality, predictability, publicity, and consultation described above. supervision — for good reason, in my view — is not subject to this formal framework. but it is currently not subject to any specific process constraint promoting publicity or universality. this leaves it open to the charge, and sometimes to the fact, of capriciousness, unaccountability, unequal application, and excessive burden. here, then, is a conundrum. we have a public interest in a confidential, tailored, rapid - acting and closely informed system of bank supervision. and we have a