Let me give you a more concrete example. Consider the following scenario for an inflation-targeting central bank. Let’s assume that inflation is near its target, but demand in the economy is weak, and the output gap is widening. This situation would normally call for an easing of monetary policy.
But what if, at the same time, there was evidence that the prices of assets such as equities or real estate were rising well above historical norms, or that there was a real surge in credit issuance relative to historic levels, or evidence of speculative overinvestment? Should a central bank then adopt a somewhat tighter policy than it otherwise would?