crisis management policy aimed to contain and overcome its effects, but, to a large extent, it has been conditioned by some of the constraints i mentioned before. monetary policy took the lead in providing countercyclical stimulus to the economy, with the ecb rapidly lowering its policy rate and injecting huge amounts of short and long term liquidity. lastly, the announcement in september of the outright monetary transactions by the ecb has been a turning point in regaining the trust of the financial markets. on the other hand, given the lack of space for stimulating fiscal policies, the public sector has been more interested in controlling long - term public debt trajectories, subtracting rather than adding to economic stimulus. to this end, the agreed fiscal compact and macroeconomic surveillance policies aim to put the eurozone public finances into a sound and credible longterm footing. on the financial side, the eu has revised its financial architecture by establishing the efsf ( european financial stability fund ) and european stability mechanism, by agreeing to establish a single banking system supervisor. lastly, there have been several structural measures undertaken, aiming to revive both the eu and countryspecific competitiveness. among others, these measures include increasing labor market flexibility, reforming the pension system, further liberalizations in the goods and services markets. what remains to be done? while arguably late, i think the policy response within the eu has gone in the right direction and has been rather comprehensive. nevertheless, further work is required in the future. bis central bankers ’ speeches i would like to highlight two of these areas. - first, the reform agenda identified by four presidents ( of the european council, of the european commission, of the eurogroup and of the ecb ) aims to complement the monetary union with a financial union, a fiscal union, an economic union and some higher degree of political union. this is an ambitious goal, but i am fairly convinced it will be accomplished within a reasonable time - scale. in this context, it is not much a wish list as it is a prerequisite for long term growth. it would indicate to the world that europe has answered the dilemma about its role in the global economy of the 21st century. - second, i think that efforts to increase eu integration should extend to include a deeper cooperation with candidate and potential candidate countries in the eastern and southeastern europe. these economies are very much connected to the eu, from an economic and financial perspective. they have undertaken structural reforms to liberalize

donald l kohn : how should policymakers deal with low - probability, highimpact events? speech by mr donald l kohn, member of the board of governors of the us federal reserve system, at the european central bank conference on monetary policy and imperfect knowledge, wurzburg, germany, 15 october 2004. * * * considering how to deal with low - probability, high - impact events has always been an important aspect of central banking. central banks and other government agencies use various policies, including supervisory vigilance and access to discount window credit, to make such situations less likely to occur and less costly when they do. even so, from time to time monetary policy settings have been influenced by the perception of a potential for serious economic and financial dislocation. before going further, i should say the views i will express today are my own and not necessarily those of other members of the board of governors or its staff. 1 adjusting monetary policy in such circumstances is an example of a more general phenomenon. when central banks are not tightly focused on achieving a specific objective for an exchange rate, a monetary aggregate, or an inflation rate, policymakers may be granted a degree of discretion and can take account of the entire distribution of potential economic outcomes and their effects on societal welfare. i used the words “ may be granted ” in that sentence quite deliberately. discretion has gotten a bad reputation in the economics profession, in part because of a too - literal interpretation of the contributions of the two newest nobel laureates. the effective use of discretion - the ability to deviate from the programmatic pursuit of a fixed goal - is only granted to central bankers when the public is confident that the opportunity will not be misused. as i reflect on my observation of central banking over the years, my impression is that policymakers these days are taking account of a broader array of potential outcomes than in the past. policy seems more frequently to be deviating a bit from a stance that is calculated only to maximize the odds of achieving a specific, numerical, economic goal. more countries have recognized the benefits of allowing exchange rates to fluctuate freely, and the inflation - targeting regimes that have replaced exchange rate anchors in many countries have become more flexible over time. this evolution has not only allowed policymakers greater scope to weigh more than one short - run objective in the pursuit of long - term price stability, but it has also permitted them to pay greater attention to the consequences of potential economic outcomes with relatively low proba