under the alternative policy. there may nevertheless be times when a well - judged monetary policy intervention is particularly effective in curbing financial excesses. adrian and shin ( 2008 ) point out that even small policy rate changes can have a large impact if financial intermediaries are highly leveraged and the changes in the policy rate affect the relevant market interest rates. and there may be times when a mixture of words and modest interest rate action is effective at cooling excessive market exuberance ; both the reserve bank of australia and the riksbank attempted to take some of the steam out of the house price boom in this way. but, generally speaking, monetary policy seems too weak an instrument reliably to moderate a credit / assetprice boom without inflicting unacceptable collateral damage on activity. instead, with an additional objective of managing credit growth and asset prices in order to avoid financial instability, one really wants another instrument that acts more directly on the source of the problem. that is what “ macro - prudential policy ” is supposed to achieve. there are multiple dimensions to macro - prudential policy. on the one hand, it encompasses actions to make the banking system more robust to shocks, recognising the interconnectedness of financial institutions. this interconnectedness was somewhat neglected in the run - up to the crisis, when it was assumed that if banks were individually safe, then the system would be too. the presence of network externalities meant this was far from being the case. a key ingredient here is increasing not only the quantity of capital available to absorb losses but also its quality, as some capital instruments have turned out to be ineffective loss absorbers unless the bank is liquidated. instruments that bail in creditors before that point is reached, such as contingent convertible bonds, therefore hold some attraction. that is particularly important for institutions deemed too large or too systemically important to fail. in addition, structural reforms can improve the robustness of the financial system. these issues are currently the object of discussion within the financial stability board and the basel committee and firm proposals, together with a transition timetable, are due shortly. while this territory is beyond the scope of this paper, it is worth noting that effective measures to improve the robustness of the financial system, by reducing the likelihood and severity of future crises, also reduce the need for monetary policy to latw. on the other hand, there is also a potential role for macro - prudential policy to cool credit / asset -

otmar issing : should we have faith in central banks? speech by professor otmar issing, member of the executive board of the european central bank, held at st edmund ’ s college millennium year lecture, cambridge, on 26 october 2000. * * * ultimately, trust must be earned, it is granted temporarily, it must be checked, and it must be backed up by hard evidence, not be based purely on faith or belief. it is a great honour and a great pleasure for me to deliver the st. edmund ’ s college millennium lecture on the topic of faith in central banking. i must confess that when professor heap first invited me to give a talk on “ faith and finance in the new millennium ” as part of a series of lectures on the general theme “ faith in the future ” i suffered an initial instant of hesitation or lack of faith, if you will. as you can imagine “ faith ” is not a natural subject to discuss for a central banker and economist, who is trained to look at facts and hard evidence. to address such a difficult issue in such a distinguished seat of learning as cambridge university would seem to require a good measure of courage. but then, of course, courage - if not faith - is an attribute that central bankers should undoubtedly possess. i am also much reassured and grateful for the faith, if i may say so, that you put in me by inviting me to talk about this subject. to make my job a little bit easier - and pull the topic a little closer to my “ home turf ” - i have taken the liberty to change the title of the lecture. i have also turned it into a question : “ should we have faith in central banks? ” i should admit from the start that i do not have an obvious and clear - cut answer for you. if there was a simple answer it would not have been an interesting question to ask... and it would have been a very brief millennium lecture. so i will try to approach this question a bit in the spirit of how i presume that cambridge undergraduates might tackle their weekly essay questions, but hopefully - given my lack of practice - i will not be graded quite as harshly. 1. a look at the dictionary should we have faith in central banks? my answer to this question depends on what is meant by “ faith ”. a natural starting point is to take a look at the dictionary. the term “ faith ” is used in a religious context as well as in everyday