This will be influenced in the medium to long term by macroprudential policies that impact the efficiency of the financial system and through it aggregate productivity. ·  ·  ·  ·  ·  Comparing the FPC’s objective function with the more familiar monetary policy objective function helps illustrate the operation of macroprudential policy: 1. Clarity of objectives. The primary objective of the FPC, financial stability, can only be estimated; whereas that of the MPC, inflation, can be readily measured. As a consequence, FPC performance is best judged in the short term by intermediate indicators and drivers of financial stability; 2. Impact on growth. Although both committees are tasked with promoting the government’s economic objectives subject to achievement of their primary objectives, the MPC has very limited ability to influence trend growth. The MPC’s trade-offs, when they occur, are to limit excessive short term volatility in output and inflation, particularly in “exceptional circumstances,” circumstances that only extend modestly the policy horizon. In contrast, the FPC is more likely to face trade-offs between short term growth and its actions to achieve its primary objective. And the FPC can have  9 The recent interest in this concept is based on work by Tobias Adrian and co-authors (Adrian, T, Boyarchenko, N and  Giannone, D (2019), ‘Vulnerable Growth’, American Economic Review, 109(4)). For a discussion, see this article by Steve Cecchetti and Kim Schoenholtz. 10 Throughout this speech, deteriorations / worse outcomes for GDP-at-risk are referred to as when GDP-at-risk is increasing / high.
This objective is founded on my belief that the first two pillars gain sustainability only if the public understand the role of the central bank, its independence and its policy. Last but equally important, I would like to emphasise the need of cooperation and coordination with the fiscal policy. Fiscal policy and its impact are facts of life which can’t be ignored. Therefore, monetary and macro-prudential policies have to be designed and implemented in full awareness of its existence. A Central Bank does not live in an isolated island; its success will, among others, depend on its ability to act in coordination and cooperation with the fiscal policy, without losing its independence. Incorporating this understanding in the central bank theory and practice requires some adjustments and flexibility but, at the same time, requires that central banks preserve their focus and independence and acknowledge their limitations. Altogether these changes will allow the central bank and its inflation targeting regime to become a useful tool at the hand of the monetary authorities to preserve economic and financial stability in the post-Global Financial Crisis period. Thank you very much for your attention! BIS central bankers’ speeches  3