policies pursued by the fomc and the ecb are due to differences in circumstances – differences in initial conditions and differences in the mix and intensities of supply and demand shocks. nevertheless, the differences in mandates and strategies likely also matter and lead to the two central banks, in effect, selecting different points along the trade off between output variability and inflation variability – with the ecb opting for lower inflation variability at the expense of somewhat higher output variability. the ecb does not consider its policy as an inflation - targeting regime. it distinguishes its approach as a two - pillar strategy that includes a focus on money growth as well as on a medium - term inflation objective. still, its approach has much in common with that of inflation - targeting regimes. of course, even for a dual mandate, low inflation is the only long - run objective, assuming that monetary policy cannot affect the long - run levels of output and employment. the bank of japan has a unique challenge. initial conditions in japan are very different from either the united states or the euro area, and there are, in addition, severe limitations on the ability of monetary policy to respond conventionally to downward shocks to demand. output is well below potential, there is ongoing deflation, and growth has been stagnant for a long period. monetary policy responded by lowering the nominal policy interest rate to zero, exhausting the conventional opportunities for additional stimulus. yet, the economy remains weak and further monetary stimulus would be welcome. this is especially true given concerns about the sustainability of their fiscal position – very large deficits and a very high and rising ratio of government debt to income. a spillover from the united states and the global slowdown will therefore have a sharper effect on japan, to the extent that its monetary policy is unable to respond. however, even once the policy rate has been driven to zero, there is a potential for additional stimulus from monetary policy – from so - called unconventional operations, though there is considerable uncertainty about their effectiveness. in principle, this additional stimulus can be imparted by monetary policy operations in longer - term government or even private securities. the channels for the increased stimulus work through the imperfect substitutability of assets and expectations about future monetary policies. such operations could lower long - term rates relative to short - term rates, lower private rates relative to government rates, result in a depreciation of the yen, extend the expectations of lower short - term rates over a longer period, and lead

laurence h meyer : the global outlook and challenges facing central banks around the world remarks by mr laurence h meyer, member of the board of governors of the us federal reserve system, at the edinburgh finance and investment seminar, held in edinburgh, scotland, 24 may 2001. * * * while the pace of economic activity has slowed most sharply in the united states, growth has also slowed in many countries. as a central banker, my focus will be on the challenges this slowdown poses for monetary policymakers. these challenges vary around the world, reflecting differences in country - specific shocks, the extent of the spillovers from these shocks, and the way individual economies respond to common shocks. monetary policy responses will also vary, even when confronted by the same circumstances, because of differences in the structure of our economies, differences in the mandates under which central banks operate, related differences in strategies that guide the implementation of their policies, and limits on the ability of some central banks to engage in expansionary policy. let me note, before proceeding further, that the views i am presenting here are my own. i am not speaking for the board of governors or the federal open market committee. the global slowdown before turning to the challenges faced by central banks, i want to set out my interpretation of the sources of, and the global nature of, the slowdown. i will begin by identifying the country - specific and common shocks that are at work and by considering the links that spread country - specific shocks around the world. the most obvious interpretation of the global slowdown is that it stems principally from a country - specific shock and spillovers from that shock around the world – specifically, the sharp slowdown under way in the united states. the principal traditional channel for spillover effects is trade, with the sharpest spillovers in the current case to countries with the highest ratios of exports to the united states relative to their incomes. the u. s. slowdown is, at the very least, a key ingredient in the global slowdown. but let me offer several other interpretations, as alternatives or perhaps more as complements. another explanation for the global slowdown is that there has been a coincidence of common adverse shocks. the most obvious is the rise in oil prices. though this shock affects all countries, the effect on each country differs depending on the relative balance between oil production and consumption. this is an example of how common shocks can have different effects across countries. two other potential common shocks are the global equity correction and