in 1985, kenneth rogoff developed the rules argument by introducing the concept of a conservative central banker. according to rogoff, society can sometimes make itself better off by appointing a central banker who does not share the social objective function, but instead places a larger weight on inflation rate stabilisation relative to employment stabilisation. although the conservative central banker resolves the trade - off between inflation variance and employment variance by opting for more stable inflation, the costs of keeping inflation stable are lower thanks to the reputation earned by the central banker over many years. the second line of theory attempting to prevent inflationary bias was the principalagent approach developed, for example, by carl walsh in 1995. in this framework, the government ( the principal ) contracts the central bank ( the agent ) to deliver the required rate of inflation and penalises it if it fails. this was the route followed, for example, by new zealand, which in 1990 became the first country in the world to adopt inflation targeting, followed in 1998 by the bank of england. these two theoretical approaches define and determine the field for the two main forms of 1 / 7 bis central bankers'speeches central bank independence : goal independence and instrument independence. while rogoff ’ s conservative banker can define her own objective function almost without restriction because she enjoys both goal and instrument dependence, a central banker ( agent ) working for the government ( principal ), usually represented by the minister of finance, has no freedom to choose the goal and is only free to decide how to achieve the goal set by someone else. empirical findings the theoretical research was accompanied by empirical studies attempting to prove a causal link between central bank independence and the rate of inflation. the first such study dates back to 1980, but probably the best known and most cited article of its era is the 1993 one by alesina and summers. although their analysis was by no means sophisticated, the authors cautiously concluded that central bank independence promotes lower inflation and its benefits probably outweigh its costs in the form of output volatility. in later interpretations, there was even talk of a “ free lunch ” for economies and governments that opt for an independent central bank. this article represented the mainstream view. later studies refined the methodology but did not change anything fundamental about the finding, so it began to be accepted as the prevailing paradigm. the view that goal independence plays the main role gained a broad consensus. in the two decades leading up to the gfc, one central bank after another

from those changes. once risks have been identified comprehensively, assessed, and evaluated as to their potential impact on the organization, management must determine the effectiveness of existing controls and develop and implement additional appropriate mitigating controls where needed. the robustness and effectiveness of these controls must be evaluated independently, soon after the control structure is established, so that any shortcomings can be identified promptly and corrected. risk assessments initiated early in the planning process can give the firm time to implement mitigating controls and conduct a validation of the quality of those controls before launching the product. strong internal controls and governance require that these assessments be done by an independent group. one of the weaknesses that we have seen is that management delegates both the development and the assessment of the internal control structure to the same risk - management, internal audit, compliance, or legal division. instead, it is important to emphasize that line management has the responsibility for identifying risks and ensuring that the mitigating controls are effective, and that the assessments should be done by a group independent of that line organization. an enterprise - wide approach also can integrate the risk assessment of functions that have traditionally been managed in “ silos ”. conflicts can arise in many different areas and functions of the firm, including sales and research. conflicts can also occur when compensation structures create incentives inconsistent with prudent risk management or when the bottom line for the current quarter is unduly emphasized without adequate consideration of the risk being taken to accomplish those results. the potential for these conflicts to arise must be addressed squarely by senior management, and appropriate controls must be in place to manage and mitigate conflicts. a culture of compliance should establish - from the top of the organization - the proper ethical tone that will govern the conduct of business. in many instances, senior management must move from thinking about compliance chiefly as a cost center to considering the benefits of compliance in protecting against legal and reputational risks that can have an impact on the bottom line. it is important to note that the board of directors and senior management of financial firms are responsible for setting the “ tone at the top ” and developing the compliance culture that has been discussed at this conference. the board and senior management are obligated to deliver a strong message to others in the firm about the importance of integrity, compliance with the law, and overall good business ethics. they also need to demonstrate their commitment through their individual conduct and their response to control failures. the message and corresponding conduct should empower line staff to el