As I have already discussed, unanticipated changes in the natural rate have contributed to forecasting errors over the past two decades. In the past few years, we have had some experience with wage setting under conditions of price stability, and nominal compensation showed greater flexibility than some observers had anticipated.
It is an important input in a strategy of “leaning against the wind”. Finally, monetary policy follows a so-called “Separation principle”, which distinguishes decisions about the monetary stance aimed at achieving price stability from tools directed at implementing monetary policy decisions through liquidity management. With these principles in mind, let me turn to the monetary policy responses to the crisis.