between economic growth and inflation than the world enjoyed over the past decade might be experienced for a time. this outcome, were it to occur, would make for a more challenging environment for macroeconomic policy makers. it would limit the extent to which monetary policies could respond to the downside risks to economic growth in the short term without risking a rise in the trend rate of inflation and a pick up in inflation expectations. i believe that central banks everywhere are acutely conscious of this. i would venture, however, that the tolerance among some parts of the investment community for a cautious approach by policy is not high, if some of the commentary we read is any guide. this, too, adds to the delicacy of the tasks facing policy makers. but it is important to stress that, were trend inflation to rise as a result of too ambitious an approach to supporting short term growth, financial prices would actually be among those most vulnerable to adjustment as long term interest rates rose. conclusion 2008 opens with the financial turmoil of the second half of last year fresh in our minds. those events, and the deeper issues that triggered them, have mainly affected some of the g7 economies and have cast a shadow over their growth outlook in the near term. emerging market economies have been less affected ; in fact, in parts of asia the main policy challenge has been to deal with the threat of overheating. will growth performance for these different parts of the world continue to diverge? or will they converge again – and if so, how? and how successful will we – all of us – be in containing the inflationary tendencies which have been evident up to now? these will be among the key economic questions for 2008. at the moment, we do not know the answers. one way or another, 2008 could turn out to be an interesting year. on that note, i wish all of you a happy new year and good judgement in the period ahead.

an inflation target. but the basic starting point is that it has to be part of and subservient to the inflation targeting regime. 1 so inflation targeting should be seen as part of an overall approach to macro policy, encompassing fiscal policy and the exchange rate regime. mishkin and savastano ( 2000, p 7 ) observe : “ what is important to stress, however, is that from the perspective of monetary policy a strategy of monetary targeting or inflation targeting does not imply or require “ benign neglect ” of the exchange rate and no intervention in the foreign exchange market ( ie a ‘ clean ’ float ). what matters is that the central bank makes it clear to the public, through both its actions and pronouncements, that the nominal exchange rate will always move in the direction set by the market and, crucially, that the exchange rate is not a nominal anchor for monetary policy and inflation expectations ”. evolution of the inflation targeting framework, and the role of economic activity at the same time that changes in views about exchange rate regimes have made inflation targeting a relevant option for a wider range of countries, so too the inflation targeting framework has, itself, become more complex over time, with an increasing recognition that a simple interpretation of an inflation target is misleading, or at least incomplete, as a guide for policy. whereas early versions of inflation targeting simply specified a target ( usually reasonably rigorously, ie narrowly ), and even went out of their way to avoid any mention of economic activity ( or its related variables, such as unemployment ) in the target itself or in inflation reports, over time there has been an increasing recognition that the target is operationally much more complicated than this, and that for it to be successful it must embody a considerable degree of flexibility. hence, the notion of “ constrained discretion ”. it is a reminder, if you like, that whatever you do in economic policy must be able to pass through the filter of common sense. you must always keep your eyes open and wits alert, taking in all the signals which the economy is giving. 2 in broad - brush terms, the change which has come about in the specification of inflation targeting regimes comes from the recognition that if the inflation target is specified narrowly and the time horizon over which it must be achieved is tight, then the effort to keep the actual inflation rate constantly within a narrow band will involve quite a bit of short - term variation of the interest rate lever ( and, consequentially, the