In recent years, most central banks have elected to adjust the policy rate in response to changing economic conditions to achieve their goals. A key question for central bankers under this approach: What level of the policy rate would bring real activity in line with its potential?
In gauging this value, a central banker seeks to be forward-looking because monetary policy influences real activity with considerable lag. The same consideration applies to assessing the effect of policy actions on inflation. 3  Charles T. Munger (2003), "Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs", Herb Kay Undergraduate Lecture delivered at the Economics Department, University of California, Santa Barbara, October 3.