How can financial imbalances enter the process of monetary policy setting in a way that makes monetary policy itself less prone to systematic mistakes? The ECB has long practised a two-pillar approach to policy-making. But note the difference between a monetary pillar and a genuine “lean- against-the-wind” attitude, as was advocated by the early participants in the debate that I was mentioning before.
Monetary and fiscal policies, through vigorous and swift action at the peak of the financial crisis, have avoided a free fall in economic activity and a further drying up of financial markets. As we gradually seem to be leaving the extraordinary circumstances behind us, monetary and fiscal policies must return to their normal mode of operation.