In the academic literature, some have suggested that the central bank can increase economic stability or reduce the negative effects of slow price adjustment by stabilising an index with fewer prices and weights other than those in the consumer price index.3 Prices that adjust slowly should have a relatively higher weight than prices that change quickly. Prices for goods and services where labour costs are a major component often adjust slowly.4 Labour costs are very important in these indices not only because they change slowly but also because they react to cyclical movements and are seldom exposed to extraordinary disturbances. 3  See Aoki, Kosuke (2001), “Optimal Monetary Policy Responses to Relative Price Changes,” Journal of Monetary Economics, Vol. 48, pp. 55-80, Arrazola Maria and José de Hevia (2002), “An Alternative Measure of Core Inflation,” Economics letters, Vol. 75, pp. 69-73, Mankiw, Gregory and Ricardo Reis (2003),“What Measure of Inflation Should a Central Bank Target?” Journal of the European Economic Association, Vol. 1, pp. 1058-1086, and Woodford, Michael (2003), Interest & Prices – Foundations of a Theory of Monetary Policy, Princeton University Press. 4  Angeloni, Ignazio, Luc Aucremanne, Michael Ehrmann, Jordi Gali, Andy Levin and Frank Smets (2004), “Inflation Persistence in the Euro Area: Preliminary Summary of Findings”, presented at the ECB’s conference on inflation persistence in the euro area, Frankfurt am Main , 10-11 December 2004. BIS Review 43/2005  3  Another topic currently of interest to academic research is whether a price level target may be better than an inflation target.
In reality the division between us was a very narrow one, reflecting the fact - now acknowledged by most outside commentators - that the decision, as to whether or not we will need to raise interest rates moderately further, sooner or later, is very finely balanced. I hope this is a situation that we will get used to. I would expect the professional experts on the MPC to agree quite easily when monetary policy is clearly off track; but I would equally expect them to disagree as often as not at the margin when we are there or thereabouts. As it is I was actually encouraged by the reaction of many of the more thoughtful commentators who - in the circumstances - recognised that it was a reflection of a grown-up process that we could publish a division within the Committee and the reasons for it without generating significant market disturbance. In this sense, too, I think it likely that once the new arrangements are properly bedded down they will be seen to be a very considerable advance on what has gone before. Financial Stability Let me turn now to the Bank’s second core purpose, the maintenance of financial stability. On the same day that the Bank of England Bill was introduced into Parliament, the Chancellor launched the new Financial Services Authority, the FSA, which will become responsible for the authorisation and regulation or supervision of effectively all forms of financial services activity in the UK.