does not end here. another thing to discuss is how monetary policy and financial stability interact. and this debate also involves our standard tool, the interest rates. interest rates have been very low for quite some time now. this has coincided with an upsurge in asset prices and a compression of spreads on risky securities. against this backdrop, some economists argue that monetary policy has an effect on both the capacity and the appetite of investors to take on risk. 4 this has been termed the risk - taking channel, and it does not play a role in standard monetary policy frameworks. these focus instead on the interest rate, credit or bank lending channels. now, how does this risk - taking channel work? well, it can work in different ways. for a start, low interest rates mean low returns. investors might rebalance their portfolios and take on more risk in order to make up for lost returns. should we be concerned about this? well, if the process is well managed, there is no need for concern. however, some financial institutions set rather inflexible target rates of return, for example because investors expect a certain minimum yield. these inflexible targets may lead them to take on more risk than appropriate. it is clear that this could lead to trouble further down the road. also, the financial system ’ s behaviour can be procyclical. there is reliable empirical evidence that loose monetary policy lowers both the measured risk in asset prices and the risk premia demanded by investors. 5 but value - at - risk approaches mean that the risk management of banks relies on measured risks. this could then lead to increased leverage, which would add even more liquidity to the global financial system. so there is a view that the risk - taking channel should be incorporated into the models that guide monetary policy. let ’ s try to unpick this argument. in my view, there are two conceptual issues here. the first is the idea that policymakers should only be concerned with risk - taking if it is excessive. but establishing whether or not risk - taking is excessive is quite hard. the second issue is that even if we conclude that there is excessive risk - taking, it is far from clear whether monetary policy would be the best tool to deal with it. let ’ s start with the first issue. what qualifies as excessive risk - taking? well, there are two conditions. risks would need to be mispriced, and investments would need to have been

is an integral part of monetary policy. a brief history of communication policy : communication of policy objectives, policy framework, and economic forecasts. in the 1960s, many economists were greatly interested in adapting sophisticated mathematical techniques developed by engineers for controlling missiles and rockets to the problem of controlling the economy. at the time, this adaptation of so - called stochastic optimal control methods to economic policymaking seemed natural ; for like a ballistic missile, an economy may be viewed as a complicated dynamic system that must be kept on course, despite continuous buffeting by unpredictable forces. unfortunately, macroeconomic policy turned out not to be rocket science! the problem lay in a crucial difference between a missile and an economy – which is that, unlike the people who make up an economy, the components of a missile do not understand and anticipate the forces being applied to them. hence, although a given propulsive force always has the same predictable effect on a ballistic missile, a given policy action – say, a 2 percent cut in the rediscount rate – can have very different effects on the economy, depending for example on what the private sector infers from that action about likely future policy actions, about the information that may have induced the policymaker to act, about the policymaker ’ s objectives in taking that action, and so on. thus, taking the “ right ” policy action – in this case, changing the rediscount rate by the right amount at the right time – is a necessary but not sufficient condition for getting the desired economic response. most inflation - targeting and non inflation targeting central banks have found that effective communication policies are a useful way, in effect, to make the private sector a partner in the policymaking process. to the extent that it can explain its general approach, clarify its plans and objectives, and provide its assessment of the likely evolution of the economy, the central bank should be able to reduce uncertainty, focus and stabilize private - sector expectations, and with intelligence, consistency, and persistence – develop public support for its approach to policymaking. why are accountability and transparency so important for monetary policy? the notion of transparency is broad ranging. it encompasses notions of accountability and political legitimacy of decision makers, as well as the legal and accounting infrastructure in which economic decisions are made. but from the operational perspective of a central bank, transparency can be regarded more narrowly in terms of the disclosure of information to a wider audience. intuitively the release of a greater volume of more precise information in