But it has got harder. 4  BIS central bankers’ speeches  Chart 1: UK inflation and output gap variances 3  Inflation variance  1958-1992  2  1  1993-2007 0 0  1  2  3  Output gap variance  Chart 2: The UK’s pre-crisis trade-off? 3  Inflation variance  Stylised ‘Taylor frontier’  1958-1992  2  1  1993-2007 0 0  1  2  3  Output gap variance  BIS central bankers’ speeches  5  Chart 3: The ‘Great Stability’ and crisis periods 3  Inflation variance  1958-1992  2  1 2008-2012  1993-2007 0 0  1  2  3  Output gap variance  Chart 4: The true trade-off for the UK over 20 years? 3  Inflation variance  1958-1992  2  1 1993-2012  2008-2012  1993-2007 0 0  1  2  3  Output gap variance  6  BIS central bankers’ speeches  Chart 5: A preferable outcome? 3  Inflation variance  1958-1992  2  1  P  1993-2012  2008-2012  1993-2007 0 0  1  2  3  Output gap variance  Table 1: Monetary base  Data are month averages for UK, US, Japan and end month for the euro area. Sources: Bank of England, Federal Reserve, Bank of Japan, ECB.
Payments and monetary and financial stability  13 To ensure that its liabilities continue to be perceived of higher quality than those of any other issuer, the institution at the apex of the payment system – typically the central bank – has an incentive to exercise close control over the terms on which they are made available to the banking system. 14 That translates into the traditional monetary stability objective: preservation of the role of the ultimate settlement asset as a store of value and unit of account. It also gives the central bank a strong interest in the stability of the financial system. And within that a reliable and resilient infrastructure for distributing the ultimate settlement asset is a key condition of stability (and of implementing monetary policy effectively). 15 In an advanced monetary economy, of course, bank deposits constitute by far the largest component of “money”; in the UK they make up some 96% of the broad monetary aggregate, M4. Agents rely on interbank payment systems to facilitate the direct transfer of deposits between banks and thereby also preserve their role as a medium of exchange. And as the sophistication of securities and other markets has grown, the core payment systems have become intertwined with the settlement and clearing systems for the key markets. Together they have become a critical part of the infrastructure not just for the financial system but for the economy more widely.