and when the adjustment process threatens the fulfilment of our mandate. we should preserve the virtues of constrained discretion : 6 a delicate and fragile blend of opposing attributes of monetary policy - making, which central banks acquired in the form of mandates in the 1990s, and which has served us well since then on our long journey back from the inflation years. let ’ s not forget that – since the early 1990s when the industrial world eradicated inflation – the emphasis in the “ constrained discretion ” oxymoron has always been on constrained. in the early 1990s rules won a long battle over discretion. and rules meant a numerical definition of the inflation objective and a flexible but certain horizon for accomplishing the objective. pushing on a string when the transmission of monetary policy stimulus is impeded by the countervailing forces of deleveraging can be counterproductive. at the same time, accepting low or even negative inflation rates in such a situation may render the balance sheet adjustment more painful and drawn - out. and it may destabilise inflation expectations. a protracted period of too low inflation, which is typical for episodes of balance sheet repair, might lead to a de - anchoring of inflation expectations, magnifying the risks of a self - fulfilling decline in the general level of prices. 7 most of the building blocks monetary policy has put in place in its fruitful interactions between academic theory and central bank practice remain valid. let me highlight three key elements : first, central bank independence ; second, a clear price stability objective supported by a quantitative definition of price stability. we chose 2 percent as the upper limit of our numerical definition of price stability because above that level inflation starts becoming a conditioning factor in economic choices. it introduces distortions. and there is no reason for the term was first used in connection with monetary policy by bernanke and mishkin ( 1997 ). for an account of the historical debates on rules vs. discretion in monetary policy, see bernanke ( 2003 ). see fisher ( 1933 ). bis central bankers ’ speeches the pace at which the nominal scale of a fiat money system drifts over time to be a distorting factor of real economic decisions. should this upper limit be made bigger in steady state because that higher level would insure against major macroeconomic crises? i don ’ t think so. maintaining a high tax almost all the time just for the pleasure of cutting it in a rare occurrence ( and even if that rare event is going to bring

##oria or disillusion. ” he went on to draw some strategic conclusions, saying that : “ … we were given two eyes : one to watch money and credit aggregates and one to watch everything else. ultimately, these two policy perspectives are to be combined in a single strategy which subsumes them both in a unified – albeit complex – and robust framework for action. ” this was alien language in the homeland of the “ jackson hole consensus ”, which did not envisage a role for monetary analysis or financial disorder in monetary policy - making at all. it has become common parlance since, even there. at the same time, i have questions – many questions – on how best to integrate balance sheet considerations into policy - making in a way that does not undermine the best legacy of the pre - crisis era : our price stability mandate. let me elaborate. bis central bankers ’ speeches balance sheet restructuring previous crises have shown that prompt and decisive balance sheet repair after a period of excessive credit growth is the best way to restore sustainable growth. 1 post - recession growth may not even be significantly weaker than normal if the overleveraged financial sector aggressively cuts back excess credit in the recovery phase. 2 like balance sheet imbalances, structural impediments to growth and to an efficient allocation of resources are generally very relevant for the conduct of monetary policy and need to be tackled decisively. trying to stimulate growth through standard aggregate demand policies may be ineffective and, under certain circumstances, even counterproductive in balance sheet recessions, when structural breaks on potential growth predominate. 3 it is for this reason that the changes to euro area and eu governance introduced in response to the crisis are so important and need to be implemented with determination. the reforms undertaken in many stressed countries, especially those benefiting from official external assistance, should eventually lay the foundations for a robust recovery. most importantly, the steps being taken to create a banking union should help to address existing balance sheet problems. the initial focus is on banks ’ balance sheets. the comprehensive assessment of their balance sheets currently being done by the ecb is a critical element. thousands of supervisors are carefully scrutinising the books of the euro area ’ s largest banks. at the end of this process, the assets in banks ’ books should accurately reflect the economic realities. that means that the value of loans to over - indebted firms and households will be adjusted to reflect the actual debt servicing capacity of these debtors. incentives for