(1997), “Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets”, European Economic Review 41, 1111–1146. Svensson, Lars E.O. (1999), “Inflation Targeting: Some Extensions”, Scandinavian Journal of Economics 101, 337–361. Svensson, Lars E.O. (2003), “Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others”, Journal of Economic Perspectives 17(4), 145–166. Svensson, Lars E.O. (2005), “Monetary Policy with Judgment: Forecast Targeting”, International Journal of Central Banking 1(1), 1–54. Svensson, Lars E.O. (2009a), “Evaluating Monetary Policy”, in Koenig, Evan, and Robert Leeson, eds., From the Great Moderation to the Great Deviation: A Round-Trip Journey Based on the Work of John B. Taylor, forthcoming, www.larseosvensson.net. 8  BIS Review 16/2010  Svensson, Lars E.O. (2009b), “Flexible Inflation Targeting: Lessons from the Financial Crisis”, speech on September 21, 2009, www.riksbank.se. Taylor, John B. (2007), “Housing and Monetary Policy”, in Housing, Housing Finance, and Monetary Policy, Federal Reserve Bank of Kansas City Jackson Hole Symposium, 463–476. Walsh, Carl E. (2009), “Using Monetary Policy to Stabilize Economic Activity”, in Financial Stability and Macroeconomic Policy, Federal Reserve Bank of Kansas City Jackson Hole Symposium. White, William R. (2006), “Is Price Stability Enough?”, BIS Working Paper No. 205, www.bis.org. Woodford, Michael (2007a), “The Case for Forecast Targeting as a Monetary Policy Strategy”, Journal of Economic Perspectives, Fall 2007. Woodford, Michael (2007a), “The Case for Forecast Targeting as a Monetary Policy Strategy”, Journal of Economic Perspectives, Fall 2007.
The financial crisis was not caused by monetary policy Many have claimed that excessively easy monetary policy by the Federal Reserve after 2001 helped cause a bubble in house prices in the U.S., a bubble whose inevitable bursting proved to be a major source of the financial crisis. 5 However, as I see it, the crisis was mainly caused by factors that had very little to do with monetary policy and were mostly due to background macro conditions, distorted incentives in financial markets, regulatory and supervisory failures (also when central banks have been responsible for regulation and supervision), information problems and some specific circumstances, including the U.S. housing policy to support home ownership for low-income households. 6 The macro conditions preceding the crisis included low world real interest rates associated with global imbalances, as well as the Great Moderation, with a long period of very stable growth and stable low inflation, which led to a systematic underestimation of risk and very low risk premia in financial markets. There were distorted incentives for commercial and investment banks to increase leverage that were made possible by lax regulation and supervision and the lack of an appropriate bank resolution regime. There were also distorted  3  The idea that inflation targeting implies that the inflation forecast can be seen as an intermediate target was introduced in King (1994). The term “inflation-forecast targeting” was introduced in Svensson (1997), and the term “forecast targeting” in Svensson (2005). See Woodford (2007a, b) for more discussion and analysis of forecast targeting.