Page 6  Where analysis of monetary transmission matters is in calibrating any policy response. The MPC needs to ensure that the monetary impulse transmitted through asset prices helps navigate the narrow course between, on the one hand, preventing above target inflation from becoming embedded in expectations and, on the other, introducing unnecessary volatility into activity and employment, and adding to any undershoot of the inflation target at longer horizons. Crucial to this is ensuring monetary developments do not accommodate price, wage and cost setting behaviour inconsistent with achieving the 2% inflation target. And one aspect of that assessment is how the evolution of the stock of assets held by the central bank as a result of QE plays out. At the Bank of England, we stopped buying assets through the creation of central bank reserves last December. The process of shrinking the QE asset portfolio – so-called quantitative tightening (QT) – commenced in February, as we ceased reinvestment of maturing bonds from that portfolio. And we are currently considering whether – and, if so, how – to begin sales of gilts held in that portfolio. (The MPC has promised to report further on its prospective approach to sales at its August meeting.) Thinking through the implications of QT for the overall stance of monetary policy is therefore key to our current policy analysis. I hope to shed some light on my considerations in that regard. Future: What implications can we draw for the future?
BIS Review 38/1997  -5-  The level of unemployment to which an economy returns when inflation expectations have been adjusted to actual inflation is usually referred to as equilibrium unemployment. It is immune to monetary policy and determined primarily by structural factors such as demographic changes, technology and the institutional conditions in the labour market. What I have just described is the textbook model for the long-term Phillips curve. The message is that an economy has a path for long-term growth that is determined by underlying, structural factors. Under certain circumstances, fiscal and monetary policy are capable of influencing fluctuations in activity around this trend, though one should not expect to be able to fine-tune demand. A basic idea behind a monetary policy focused on price stability is that the economy is capable of sustained growth along this long-term path. If this path accommodates a rapid increase in production, growth will be high; but if potential output rises slowly, actual growth will be weak even if monetary policy were to be very expansionary and possibly affect the situation temporarily. A very important conclusion from this is that permanently low unemployment cannot be achieved by accepting permanently high inflation. In other words, sustained employment cannot be generated by implementing an expansionary monetary policy and disregarding unemployment’s equilibrium level or the potential level of output.