Flexible inflation targeting builds a bridge between the long-term objective of monetary policy, which is to keep inflation  2  This is discussed in “Measures of core inflation” in Bank of England’s Inflation Report of February 2006. See www.bankofengland.co.uk. 6  BIS Review 49/2006  on target and provide an anchor for inflation expectations, and the more short-term objective of stability in the real economy. In some situations, it may be desirable to bring inflation rapidly back to target. In other situations, it may be desirable to apply a longer horizon. In this context, it may be appropriate to differentiate between supply-side and demand-side disturbances. The horizon must also been seen in the light of developments in house prices and debt. However, for monetary policy to function as intended, it is important that there is confidence in the nominal anchor. Thank you for your attention. BIS Review 49/2006  7
9  Bernanke (2010) shows that Fed policy rates do not seem excessively low given real-time FOMC forecasts. 10  See Del Negro and Otrok (2007), Jarocinski and Smets (2008), Edge, Kiley, and Laforte (2008), and Iacoviello and Neri (2008). 11  See Nyberg (2010) for similar arguments. BIS Review 16/2010  3  (although they could have ended the Great Moderation with a deep recession and deflation). 12 However, going beyond the Fed’s actual monetary policy, perhaps it is possible that the Fed’s emphasis on its readiness to relax monetary policy aggressively in the wake of a sharp fall in asset prices, as expressed by Greenspan (2002) for example, may have induced expectations of a floor under future asset prices and contributed to the asset-price boom, the so-called Greenspan put (Miller, Weller and Zhang, 2002). Arguably, this is more of a communication issue than one of actual policy, and less emphasis on the readiness to clean up after a sharp fall in asset prices might have been a preferable alternative. The International Monetary Fund (2009, Chapter 3) has investigated the role of monetary policy in causing financial crises. A large number of countries and financial crises were included in the sample.