6 Such thinking had an important bearing on the design of the institutional framework for Monetary Union in Europe. The ECB has been assigned the primary objective of maintaining price stability in the euro area, establishing a clear hierarchy of goals with price stability at the fore. The clarity of this objective bolsters the credibility of the single monetary policy: it  5  See H. Theil (1964). Optimal decisions for government and industry, Amsterdam: North Holland. 6  See: M. Goodfriend and R. King (1997), “The new neoclassical synthesis and the role of monetary policy”, NBER Macroeconomics Annual 12, pp. 231–296; and J.J. Rotemberg and M. Woodford (1999), “Interest rate rules in an estimated sticky price model”, in ed. J.B. Taylor Monetary policy rules, Chicago University Press, pp. 57–126. BIS Review 45/2010  3  supports the institutional independence of the ECB and helps to stabilise private longer-term inflation expectations at levels consistent with price stability. At some other central banks, monetary policy has been given a dual mandate, with objectives such as economic activity, employment, financing conditions or financial stability in addition to the goal of price stability. I do not want to give the impression that we are indifferent to such concerns at the ECB: on the contrary, I will discuss in a moment how we can help to attain them. But monetary policy should not be over-burdened with additional objectives. It is too blunt an instrument to be effective in achieving all the goals I have just listed.
At the global level, the incorporation of emerging markets into the world economy weighed down on price developments (especially of manufactured goods). In response to the resulting benign inflation developments, the prevailing inflation targeting orthodoxy led to the adoption of an accommodative monetary policy stance. In retrospect, such accommodation was probably inappropriate, at least to the extent that it supported the financial imbalances and asset price bubbles that underlay the recent financial crisis. Failure to take into account financial factors and channels of transmission led to a mis-calibration of the monetary policy response to the impact of globalisation. A simplistic account of the financial sector may have had other, adverse implications for the conduct of monetary policy in recent years. Within the canonical New Keynesian model, financial markets are “perfect”. On the basis of arbitrage considerations, long-term interest rates and other yields and asset returns all derive from the expected path of short-term interest rates determined by the central bank. Such a construct suggests that monetary policy-makers can steer long-term rates closely by simply making pre-commitments about the future path of short rates. No doubt there is an  16  See: E. Fahri and J. Tirole (2009), “Leverage and the central banker’s put”, American Economic Review 99(2), pp. 589–93. 17  See: D.W. Diamond and R.G. Rajan (2009), “Illiquidity and interest rate policy”, NBER working paper no. 15197. 18  See: T. Adrian and H.S. Shin (2009), “Financial intermediaries and monetary economics”, Handbook of Monetary Economics, forthcoming; R.G.