As summarised in Table 1: The purpose of the intervention was grounded in the risk to UK financial stability from dysfunction in the gilt market. The Bank’s Financial Policy Committee (FPC) identified this risk and recommended that the Bank take action to safeguard against it; The operation was strictly time limited. The purchase window was open for 13 business days, the minimum period judged necessary (through contact with market participants) for pension and LDI funds to improve their resilience. This hard deadline, though criticised in some quarters at the time, proved critical in driving timely recapitalisation, and also gave policy makers and markets confidence that the time profile would be very different from QE. Similarly, the commitment to unwind the gilt holdings in a timely but orderly way gave confidence that there would be no lasting impact on the Bank’s stock of gilt holdings – the variable voted on by the MPC during QE. [16] Unwind was completed using an innovative demand-sensitive approach over a period of four working weeks – broadly the same time it took to run up the holdings. [17] The operation was targeted only at those assets involved in the LDI adjustment – long-dated conventional and (in the latter phases of the operation) index-linked gilts, whereas QE operations took place across the (conventional) curve; and  Page 10  The operations were subject to a system of backstop reserve pricing, aimed at ensuring we purchased only as many assets as required to resolve the financial stability issue and recatalyse the market.
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. 4  Several central banks that do not call themselves inflation targeters effectively do conduct flexible inflation targeting, although they may not be quite as transparent about their inflation target, the role of stability of the real economy, etc. 5  See, for instance, Taylor (2007). 6  See Bean (2009) for an extensive and excellent discussion of the crisis, including the credit expansion and housing boom, the macroeconomic antecedents, the distorted incentives, the information problems, the amplification and propagation of the crisis into the real economy, the policy responses and the lessons for monetary policy and economics generally. The Bank for International Settlements (2009) provides a more detailed account of the possible macro- and microeconomic causes of the crisis. BIS Review 16/2010  5  incentives to exercise less due diligence in loan origination because of securitisation and to conduct regulatory arbitrage by setting up off-balance-sheet entities, which for various specific reasons ended up still effectively remaining on the balance sheet. There were also distorted incentives for traders and fund managers to take excessive risks because of myopic and asymmetric remuneration contracts.