to provide some general thoughts on that question while acknowledging that this is not an area for simple answers. when economists talk about policy frameworks in a given field, they like to think in terms of a taxonomy that has ( at least ) the following main elements : • first, the objectives – what is the policy aiming to achieve? • second, the instruments – what are the tools available for achieving them? • third, the strategy – what are the logical processes linking the instruments to objectives? • and finally, governance – who are the decision makers, and how are they held accountable? in the case of the monetary policy function of central banks these questions have been well studied, and there is by now a well - established consensus as to what constitutes a best practice framework, at least in general outline. it could be summarised as follows : • the objective is inflation control, possibly defined as a numerical target and possibly broadened to incorporate some element of business cycle stabilisation. • the policy instrument ( in conventional circumstances ) is the short - term interest rate4. • the strategy could be modelled as something like what economists refer to as a ‘ forward - looking taylor rule ’. this essentially says that the interest rate is adjusted to lean against fluctuations in output and inflation, in order to exert a stabilising influence on both. • and the governance structure should involve the government setting the objective and an independent central bank controlling the policy instrument, subject to appropriate accountability. obviously this summary glosses over a vast amount of detail, but in concept at least the framework is reasonably well studied and well accepted. for financial stability policy, the position is much more complex. i leave aside here the question of ‘ unconventional ’ measures when interest rates are at or near zero. bis central bankers ’ speeches the objective might be defined as something like avoid financial instability, or perhaps slightly more scientifically, keep the risk of system - wide financial disruption acceptably low. these things of course can't be readily quantified, at least at the level of the system as a whole. there is no simple measure of system - wide financial risk, and the concept certainly can't be expressed as a numerical target in the way that can be done for the inflation objective. that doesn't mean, however, that the task is hopeless. we are better, i think, at identifying particular sources of risk, like excessive leverage, poor credit standards, or leveraged asset booms, than we are

glenn stevens : overview of the australian economy and future challenges opening statement by mr glenn stevens, governor of the reserve bank of australia, to the house of representatives standing committee on economics, canberra, 26 november 2010. * * * when we last met with the committee in february this year, it was becoming clear that the recovery in the global economy was proceeding faster than many had expected. it was also clear that the strongest performance was in the emerging world, while recoveries in countries that had been at the centre of the financial events of 2007 and 2008 were relatively subdued. global financial markets had continued to improve, but were paying close attention to the rise in sovereign debt in a number of countries. at that time, people were talking about an expansion in global gdp of something like 4 per cent in 2010. as it turns out, it looks like the outcome will be stronger than that : current estimates for the year are about 4¾ per cent, which is above trend. the pattern of growth is still rather uneven. the additional strength has been concentrated in the emerging countries, with growth in china and india running at a pace of around 10 per cent in 2010. in contrast, growth of about 2½ per cent for the g7 group, after a contraction of around 3½ per cent in 2009, will leave a considerable margin of spare capacity and particularly of unemployed labour. financial markets and policymakers have maintained, and indeed increased, their focus on issues of sovereign debt sustainability. first greece, and now ireland have sought financial assistance from european partners and the imf, after a change in economic circumstances and a large rise in market borrowing costs left authorities with little other option, even with deep cuts to spending. across continental europe and the united kingdom, governments are embarking on a path of fiscal consolidation, in order to put public finances on a sounder footing in the face of increased obligations and reduced revenues. these programs will unavoidably have some short - term dampening effects on economic activity, which will likely become clearer during 2011. but the scope of alternative possibilities open to the governments concerned is really rather limited. in this environment it is no surprise that the major central banks are mostly maintaining very low interest rates and in some cases increasing the sizes of their already expanded balance sheets via asset purchases. these actions are designed to impart some further stimulus through reducing long - term interest rates even further or via effects on private - sector balance sheets. yet at the same time many other countries have moved to tighten