Throughout these changes, a constant feature has been central banks’ search for effective means of implementing policy in an environment where economic agents can use new instruments and markets to arbitrage their way around restrictions and controls. The desire to avoid distorting incentives and exacerbating moral hazard has been a guiding principle in this search.
The authorities have sought anchors for policy that are compatible with profit-seeking behaviour by private agents in an increasingly competitive market. It is this search that will be the underlying theme of this lecture. I will begin by noting some of the driving forces behind the changes that have taken place in the financial industry, and how they have manifested themselves.