5  1  An additional element has been exchange rate targeting which was based on an external anchor. Effectively, this represents an intermediate objective if domestic credibility of the central bank may be weak. 2  See Greenspan (2002), Blinder (2005), Mishkin (2007) and Bean, Paustian, Penalver, and Taylor (2010), “Monetary Policy after the Fall”, Federal Reserve Bank of Kansas City Annual Conference, Jackson Hole, Wyoming, August. 3  See the discussion in Christiano, Ilut, Motto, and Rostagno (2010) on “Monetary policy and Stock Market Booms.”  4  See “A Monetary Policy Strategy in Good and Bad Times: Lessons from the Recent Past” Fahr, Motto, Rostagno, Smets and Tristani, ECB Working Paper Series No. 1336, May 2011. 5  See the evidence in Fischer, Lenza, Pill and Reichlin (2008): “Money and monetary policy – the ECB experience 1999–2006” and Trichet (2008): “Risk and the Macro-economy”, Keynote address at the conference “The ECB and its watchers X”. 2  BIS central bankers’ speeches  Nonetheless, I think it is fair to say that nobody – including central bankers – has expected a crisis of the dimension that we have been experiencing since five years. 6 The overall favourable macroeconomic constellation from the Great Moderation, with low volatility and robust growth, has certainly induced some benign neglect – also on the policy side.
Through these functions, a meeting place is formed by the financial system (and particularly the banks) for the economic activities of households and companies. Perhaps it could be likened to a motorway junction for the economy. In the financial sector, the income and expenditure of households and companies meet like traffic flowing from all directions. A robust construction is needed to make this interaction proceed smoothly. When a lot of traffic is moving at high speed, the construction must also have a clear focus on safety. The higher the speed limit, the greater the safety margins must be. Financial crises have major macroeconomic costs Just like driving on a motorway, the financial system entails risks. On the roads, these risks do not just affect the driver’s own vehicle, but the entire flow of traffic. In the same way, the economic costs of a financial crisis are significant. Nobody could have missed this in recent years. We know that financial crises have permanent effects on growth. It is often not possible to recover from the major fall in GDP that is the consequence of a deep financial crisis in the period following such a crisis. Normally, we see a downwards shift in GDP level trend even if good times may then mean a return to the same rate of growth. The economic costs are significant. Of course, any estimate would vary depending on the crisis and assumptions, but a mainstream assessment would be just over 60 per cent of precrisis GDP.