Low inflation reduces distortions from signals in market prices and facilitates longer-term planning. Low and stable inflation also anchors inflation expectations; in turn, anchored expectations make it easier for the central bank to control inflation with smaller variations in real activity. That brings me to my second major lesson: Expectations are critical to policy success.
Expectations about future policy help to determine the financial conditions that affect spending and inflation. In most situations, policy will need to be conducted so that expected real interest rates are positive; a policy that pushes expected real rates below zero would be appropriate only in special circumstances, such as when real activity is expected to be persistently weak and inflation undesirably low.