While, again, no one is pretending that the path of prices can be fine-tuned, a concern for the general path of inflation, as opposed to one point on the path, offers the best chance of achieving the inflation target on average.2 This is relevant to the late 2003 decisions, which saw inflation at 2½ per cent during 2005 but most likely on the way higher than that subsequently.
However, over-dependence on ex ante regulations and specific guidelines will undermine the incentive for management to pursue differentiation because the development of new instruments is not linked to initial rewards attaching to innovators, thereby leading to the spread of a “keep up with the Joneses” mentality among financial institutions.