assess the alternative courses of action available to central banks in general, and the snb in particular, to derive principles for a future in which financial and price stability are better reconciled with one another. i. the great moderation : a success of monetary policy? let me start by considering the state of many developed economies, to include switzerland, before the onset of the crisis. in contrast with the episodes of high inflation which prevailed in the 1970 ’ s, rates of inflation were subsequently stable and low for some twenty years. this period, which is commonly referred to as the “ great moderation ”, was also characterized by low real gdp volatility and low interest rates. slide 1 illustrates these developments in the cases of the united states and switzerland in this period. though there is no definitive analysis of the causes of the “ great moderation ”, monetary policy is regularly cited as a contributing factor. 2 this accords well with observations that this order of priorities is in line with the national bank act, article 5, which clearly states that “ ensuring price stability ” is the snb ’ s primary goal while it should also “ contribute to the stability of the financial system ”. other commonly cited causes are : i ) financial deepening resulting from developments in the financial markets in the 1980 – 90 ’ s such as options, hedging tools, etc. ; ii ) less and more stable government regulation and taxation ; iii ) luck. bis central bankers ’ speeches major progress had been made in identifying the determinants of inflation, understanding the importance of central bank independence and therefore in improving the conduct of monetary policy. at the methodological level, these developments are generally linked to the concept of “ inflation - targeting ” 3 and summarized in a class of macroeconomic models, which marvin goodfriend and robert king4 have named “ the new neoclassical synthesis ”. this label tells of an approach that combined key elements of keynesian and classical thinking. while the new models made conditional forecasting possible and permitted scientifically appropriate policy evaluations, they only included primitive financial sectors. in their current state, they therefore cannot address issues of financial stability or the link between low interest rates and financial excesses. ii. the recent financial crisis : are central banks the culprits? the recent financial crisis has thrown the positive pre - crisis perceptions of modern monetary policy into question. indeed, many analysts now attribute a certain degree of responsibility for the financial crisis to central banks, in sharp contrast with the

. 15 the “ taylor rule ”, the “ supply shock ” hypothesis and the “ risk - taking channel ” theory all have one common feature. every one of them acknowledges the possibility that interest rates may have been too low prior to the crisis, though their proponents may disagree as to whether, or to what extent, this was the result of a policy or paradigm failure. there is also consensus that this may have contributed to the financial instability that followed, although only the theory of the “ risk - taking channel ” clearly suggests how this would have come about. iii. “ leaning against the wind ” : an unfavourable trade - off between financial stability and output growth if interest rates were indeed too low in the pre - crisis years, it would appear that by raising them central banks could have helped avoid, or at least contain, the crisis. when this calls for deviations from otherwise optimal policy, one talks of “ leaning against the wind ”. in economic upturns, this would involve central banks setting higher interest rates than would be necessary to achieve price stability alone. the objective would be to avoid the overvaluation of assets, to constrain excessively risky behaviour on the part of financial intermediaries and hence to prevent bubbles from emerging, or at least to reduce their size. in contrast, alan greenspan was widely credited for supporting a “ clean up after bubbles ” approach. this basically involves central banks actively sustaining the economy after an asset price bubble has burst, rather than using monetary policy to try to prevent the bubble from developing in the first place. the rationale for this approach is that it is more costeffective overall, as bubbles are very hard to identify. erroneously implemented “ leaning against the wind ” policies could well impose significant economic costs with no real subsequent benefit. the huge cost of the recent financial crisis has decreased the weight of such objections to “ leaning against the wind ”. it is therefore important to further examine the potential of a preventive policy. charles bean et al16 strive to estimate the impact a “ leaning against the wind ” would have had on asset prices and real output in the recent financial crisis. the charts in slide 6 show the simulated impact on credit, real estate prices and gdp growth of a policy which would push us interest rates 200 basis points higher than were actually observed between 2003 to 2006. the slide illustrates that the simulated policy would probably have kept real house prices some 7. 5 percent lower than they were at their peak. the