This is the bad news. The good news, however, is that, first, many of the principles underlying pre-crisis monetary policy frameworks are still perfectly valid, so that, in a sense, we do not have to “reinvent the wheel”. Second, the adoption of macro-prudential policies aimed at taking care of the buildup of disequilibria in asset markets, or within specific segments of such markets, offers the possibility of effectively tackling the problems which led us to the current predicament. Thank you for your attention. References Altunbas, Y., Gambacorta, L., and Marqués-Ibáñez, D. (2010), “Does Monetary Policy Affect Bank Risk-Taking?”, ECB Working Paper n. 1166, March 2010. 8  BIS central bankers’ speeches  Borio, C., and White, W. (2003), “Wither Monetary and Financial Stability? The Implications of Evolving Policy Regimes”, presented at: Monetary Policy and Uncertainty: Adapting to a Changing Economy, a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 28 – 30, 2003. Claudio Borio and Haibin Zhu (2008), “Capital Regulation, Risk-Taking, and Monetary Policy: A Missing Link in the Transmission Mechanism?”, BIS Working Paper n. 2588, December 2008. Ciccarelli, M., Maddaloni, A., and Peydró, J.-L. (2009), “Trusting the Bankers: Another Look at the Credit Channel of Monetary Policy”, ECB, mimeo. Dubecq, S., Mojon, B., and Ragot, X. (2010), “Fuzzy Capital Requirements, Risk Shifting and the Risk Taking Channel of Monetary Policy”, Banque de France, mimeo. Friedman, M. (1968), “The Role of Monetary Policy”, American Economic Review, 58(1), 1–17.
This logically implies that an exclusive focus on the two-year ahead central inflation projection will cause policymakers to miss the risk of undershooting the inflation objective sometime in the future, possibly by a non-negligible amount. In turn, this implies that the central projection for inflation does not represent a sufficient statistic for monetary policy, and that a more sophisticated approach, factoring in the possibility of “tail risks” such as the bursting of a bubble, should be taken into account. A possible way of addressing the problem  9  See Dubecq et al. (2010). 10  See Reinhart and Rogoff (2009). 6  BIS central bankers’ speeches  within the traditional forecast-based framework which has been dominant among inflationtargeting central banks is to extend the forecast horizon beyond two years ahead. The risks to the central inflation projection deriving, say, from excessive credit growth and the resulting build-up of an asset price bubble would then be encoded in the probability distribution for inflation at longer horizons. This would allow the central bank to meaningfully discuss the dangers associated with such a build-up, and – assuming that within future policy frameworks monetary authorities will be endowed with macro-prudential instruments – it will allow them to explain to the public the adoption of measures designed to curb credit growth.