Chart 4 plots a measure of financial markets’ expectations of UK inflation since 1985. Also shown is the date of Bank of England independence and inflation targets since their inception in 1993. These measures of inflation expectations were consistently and materially above target in the period prior to independence – the myopia or inflation bias problem looked real. But from pretty much the point of announcement of independence, they began ratcheting down. Within 12 months, they were aligned with the inflation target. They have stayed there in the period since. The Bank of England has thus far passed the marshmallow test. Another lens is provided by looking at the stability of inflation and output either side of central bank independence (Chart 5). Since independence, UK inflation variability has fallen by a factor of five and output stability by a factor of almost two. As this period saw the largest macro-economic collapse in memory, it loads the dice against independence. This evidence may seem to suggest that central banks have tamed the inflationary tiger. That metaphor is apt. Friedrich Hayek likened the process of controlling the economy as akin to taking a tiger by the tail. 53 As far as inflation control is concerned, Hayek was right. As some countries are finding today, the tiger is capable of biting back. Chart 6 plots inflation expectations from financial markets in the UK, US, the euro-area and Japan over recent years. In Japan, inflation expectations have been anything but wellanchored, varying significantly around a trend close to zero.
Indeed, I wish to argue that the evolution of central bank policy frameworks over recent years can be seen as an attempt to make them robust to  1  It was a term first popularised by Ben Bernanke, then-Chairman of the US Federal Reserve Board (Bernanke (2004)). 2  In Greek mythology, Nemesis was the spirit of divine retribution against those who succumb to hubris (arrogance before the Gods). The term hubris now typically refers to a loss of contact with reality and an overestimation of one's own competence, accomplishments or capabilities. 3  Loewenstein et al (2008), Kahneman (2011), Mischel (2014), Urminsky and Zauberman (2014). 4  Blinder (2004), Reis (2013) and Friedman and Schwartz (1963). 5  There are some obvious exceptions in research on monetary policy decision-making, discussed below. Sibert (2006) also discusses the topic of “Central bank psychology”. BIS central bankers’ speeches  1  psychological biases. I want to illustrate that by reference to the Bank of England’s policy framework. And, based on that analysis, I want to suggest some areas where a further evolutionary “nudge” in those frameworks might be warranted. 6 Behavioural biases in practice The literature on behavioural economics has sky-rocketed over recent years. 7 This identifies a long list of cognitive ticks that can affect human decision-making. All of these are likely to affect policy decision-making to some degree. But from that potentially very long list, let me highlight four biases which may pose a particular policy-making challenge.