In practice, only a small number of central banks can draw on a sustained history of successful monetary policy, amongst them, the Federal Reserve, the Bundesbank and the Swiss National Bank. Fortunately, in recent years, an increasing number of central banks are rapidly accruing credibility in that painstaking process referred to by Alan Blinder. 6 When we think about expectations, transparency and credibility in the context of monetary policy, it is important to remember that they cannot and should not be substitutes for action. It is often said that a  4  See for example McKinsey (2005), where it is shown that the ratio of the global financial stock (including equity, debt securities and deposits, but excluding real estate) was roughly three times the size of world GDP in 2003, while it was about equal to world GDP in 1980. 5  The growing importance of balance sheet considerations in monetary policy was noted by Alan Greenspan in his reflections on central banking at the Jackson Hole Symposium 2005. "In particular, our analysis of economic developments almost surely will need to deal in greater detail with balance sheet considerations than was the case in the earlier decades of the postwar period. The determination of global economic activity in recent years has been influenced importantly by capital gains on various types of assets, and the liabilities that finance them. Our forecasts and hence policy are becoming increasingly driven by asset price changes."
Interest rates which determine savings and investment decisions and therefore have a stronger impact on the economy typically have longer maturities. In order to impact the economy, monetary policy impulses must therefore first be transmitted from the money market to the capital market. The money market and the capital market are linked by expectations. Neglecting transaction costs and risk premiums, the expectations theory of the term structure views the long-term interest rate as an average of the shortterm interest rates expected to prevail until the maturity of the respective bond. Although current shortterm interest rates have some effect on longer-term bond yields, the expectations theory of the term structure tells us that it is primarily expected future short-term interest rates which determine bond yields. In practice, due to uncertainty about the future evolution of short-term interest rates and due to time-varying risk premiums, the longer the maturity, the weaker the link between current short-term rates and long-term rates. Therefore, in practice, a central bank would often find it difficult to guide longer-term interest rates to a level commensurate with what it considers to be the optimal monetary policy stance. Assuming a flexible exchange rate regime, the exchange rate is arguably the quickest transmission channel for monetary policy, particularly in open economies. Exchange rate movements rapidly affect prices (via import prices) and subsequently demand (by boosting imports and slowing down exports, or vice versa). In theory, monetary policy impacts exchange rates via the yield curve and from there via interest rate parity relations.