of a given stance of monetary policy against the objectives of the federal reserve. while the evolution toward more efficient and globally integrated financial markets is surely a positive for long - run economic growth both here and abroad, it also challenges policymakers to constantly update and question our understanding of the behavior of financial market indicators and the signals that these indicators can provide in the policymaking process. and as financial markets continue to broaden and deepen, the behavior of asset prices will play an important role in the formulation of monetary policy going forward, perhaps a more important role than in the past. what might this mean for the fed and for other central banks in practice? there is a well established, and i believe fundamentally correct, case against directing monetary policy at specific objectives for asset values or the future path of those values. in other words, asset values should be neither a target nor a goal of monetary policy. the rate of increase in asset values alone seems to tell us very little about underlying and future inflation. because we know so little about how to assess the appropriateness of asset values against fundamentals, because we have so little capacity to both forecast and predictably affect the future path of asset prices, and because we know relatively little about how changes in wealth affect the real economy and inflation, we cannot use monetary policy responsibly or effectively to achieve specific objectives for asset values. monetary policy does not today and is unlikely in the future to offer us an effective tool for directly reducing the incidence of large or sustained deviations of asset values from what might turn out to be their fundamental values, what some call bubbles. that said, monetary policy still has to take into account the impact of significant movements in asset values on output and inflation. financial asset prices, by their nature, allocate resources between the present and the future and thereby affect consumption, investment and future growth. history provides us with numerous examples in which significant movements in asset prices have had sizable effects on the path of output relative to potential and on price stability. and experience suggests that asset values can be very sensitive to movements in monetary policy or to the perceptions of future policy moves. the challenge for central banks is to determine how movements in asset values and expected asset values affect the evolution of the economy. there is little to suggest that the task has gotten easier with the increasing complexity of financial markets, and it has more likely gotten harder. the incorporation of asset price movements into monetary policy formation is hard to do, in part, because we don

masaaki shirakawa : international policy response to financial crises remarks by mr masaaki shirakawa, governor of the bank of japan, at the federal reserve bank of kansas city's annual economic symposium, jackson hole, wyoming, 21 august 2009. * * * introduction i will explore the future of international coordination between central banks in the wake of the current financial crisis. here, i mean by coordination between central banks that they attempt to respond to and stave off a global crisis effectively in an organized way without any outside pressure. the current crisis has posed enormous challenges on many fronts to policymakers. as the starting point for discussing those challenges, i think it is important to highlight three facts. first, the global economy has encountered a crisis more frequently in the past 20 years than before. second, the current crisis has grown literally into a global crisis. the global economy has contracted sharply since the fall of 2008, as often described as falling off a cliff. by contrast, the prior crises such as japan ’ s post - bubble period and the east asian crisis still remained local, even though they exerted significant adverse effects on the domestic or regional economy. 1 third, the soundness of financial institutions before the crisis differed significantly between those countries in question. asian financial institutions, including japanese institutions, as well as canadian and australian ones, had smaller exposure to complicated structured products, compared with u. s. and european institutions. those three points provide a sound basis for considering how to forestall a crisis. causes for global financial crisis here, i will try to summarize some stylized facts about the unfolding of crises, including the current one. during a pre - crisis period, benign economic conditions, just like the “ great moderation ” prior to the current crisis, usually prevail for some time, and the risk - taking attitude of economic agents becomes aggressive. in economic analysis, economic agents ’ preferences are assumed to remain unchanged over time. but, in reality, risk perception becomes optimistic and risk tolerance is elevated under benign economic conditions. unfortunately, our knowledge of a mechanism of such endogenous changes in the risktaking attitude, or risk - taking channel, is quite limited. institutional arrangements, such as regulation, valuation, and compensation, shape incentives at a micro level. given institutional arrangements, an actual implication of such incentives is importantly influenced by the financial and economic environment at a macro level. in that respect, low inflation and high growth coupled with low volatility