innovation fosters faster dissemination of information and its more rapid incorporation into financial market prices. this is of course particularly true for monetary policy decisions and can therefore increase the effectiveness of monetary policy via the interest rate channel. second, financial innovation contributes to an increased holding of financial assets by lowering transaction costs and facilitating arbitrage, hedging, funding and investment strategies. third, financial innovation often relies on greater leverage, increasing the effect of interest rate moves by the central bank. however, in times of combination of financial stress and adverse supply shocks, such as we are now facing, the risk of destabilising highly - leveraged financial institutions of potential systemic importance could complicate the task of the monetary policymaker wishing to raise the policy rate in a timely manner so as to prevent inflationary risks from materialising. besides, when conditions are less benign than usual, the transmission process along the interest rate curve may become non - linear : a striking feature of this summer ’ s events was the surge in short - term money market spreads in the euro area as well as in the united states and the united kingdom. wider and variable spreads between term funding rates, of which many bank loans are priced off, and policy rates are worrying in as much as they may reduce the efficiency of interest rate moves when needed. that said, as this situation stems from a sharp reduction in term liquidity due to a general fear of withdrawal among providers of liquidity, e. g. money market funds, its unwinding requires an appropriate provision of central bank liquidity to the short - term interbank markets but not necessarily a change in the policy stance. in contrast to the enhancement of the interest rate channel, at least in normal times, financial innovation is traditionally expected to have weakened significantly the so - called bank lending channel. financial innovation gives firms broader access to securities markets and, as such, makes them less dependent on bank funding. similarly, banks may be more able to issue debt securities and less dependent on the constraint of funding themselves with secured deposits. moreover, securitisation by banks was expected to alleviate their liquidity constraints and thus to further weaken the credit channel. indeed, previous research has generally found that banks have used credit market innovations such as loan sales and securitisation to diversify credit risk exposures and increase lending. however, recent research has highlighted the potential for bank capital regulation and market discipline to shape a bank capital channel of monetary transmission. viewed as an extension of the

, because in normal times regular flows of macroeconomic statistics more or less suffice to form a correct assessment of the outlook. special communication efforts are also required. one big challenge for communication in times of stress is to make the public understand that short - term liquidity management can be completely separate from the definition of the monetary policy stance with a medium - term perspective. as i have already pointed out 1, a standard result in economic theory ( william poole ’ s paper from 1970 ) states that, when demand for central bank money is uncertain, then it is optimal to stabilise the short - term interest rate, letting money supply adjust endogenously. that is precisely what has happened in the euro area over the last half year. indeed, the bulk of liquidity injections since last august was merely an attempt to align the cf. c. noyer, “ no moral hazard : the banks are doing their job ”, financial times, 18 september 2007. timing and maturity of the liquidity supply with a changing demand within the reserve maintenance periods, in order to stabilize the very short - term interest rate on the interbank market. of course, this is always a difficult task, since the increase in the precautionary demand for liquidity altered the behaviour of banks and rendered less efficient, at least temporarily, the forecasting models we use to calculate the benchmark need for liquidity. however, since the eurosystem acted as a price taker during these liquidity injections, it is obvious that the interest rates at which these fine - tuning and longer - term operations were settled had no information content for the monetary policy stance. in a period of increasing inflationary risks stemming notably from excess demand for commodities and energy worldwide, it is crucial that our liquidity management is not misinterpreted and does not contribute to a deterioration of inflation expectations. conclusion to conclude briefly, i shall invite you not to expect too much of monetary policy. not only, to quote the economist 2, are we, central bankers, “ only human ”, but also, to put in more classical words, monetary policy alone cannot do everything with one single tool, the policy rate. a lesson that the subprime crisis has taught us is that a lot has still to be done in order to improve the regulatory framework in which the financial innovation process takes place. i have no time to develop this further, but i am confident that in particular the implementation of basel ii will bring significant