This point was already raised almost ten years ago by Miller et al. (2001), who argued that eliminating  3  4  See, for example, Acharya and Naqvi (2010). BIS central bankers’ speeches  downside risk of asset prices feeds the bubble, so more bubbles were not only the result of irrational exuberance but was also “exaggerated by the faith in the stabilizing powers of Mr. Greenspan.” Regarding the second question, on the instruments for financial stability, this is what has been termed macroprudential tools, as opposed to the microprudential regulation, which targets the health of specific financial institutions. One of the first tools used for financial stability was the dynamic provisions to housing loans implemented in Spain in 2000. It is still too early to have a full evaluation of this instrument, since it did not avoid a housing bubble, many small institutions dedicated to housing finance, the “cajas”, went bust during the crisis, but the overall Spanish financial system fared well through it all. On the time dimension, the idea of macroprudential tools is to avoid the buildup of financial vulnerabilities in the upturn of the business cycle, and to have a cushion for the downturn. Financial systems tend to be procyclical, and hence some break system should be implemented to avoid excessive risk-taking. This has been underlying the new rules in Basel III, especially in the definition of the countercyclical buffer of new capital requirements.
The crisis also left some lessons for the profession and the way we use our highly stylized models in policy-making. The narrow view is to think they are a precise description of how the world works, when in truth it is much more complicated. However, the other extreme view – and a very bad one for policy-making – is disregarding all that we have learned from academic work. We need to be humble about the extent of our knowledge, but we also have to be rigorous and serious about policies. 6  BIS central bankers’ speeches  References Acharya V. and H. Naqvi (2010), “The Seeds of a Crisis: A Theory on Ban Liquidity and RiskTaking over the Business Cycle,” mimeo, NYU. Bernanke, B. (2011), “The Effects of the Great Recession on Central Bank Doctrine and Practice,” speech at the Federal Reserve of Boston 56th Economic Conference. Bernanke, B. and M. Woodford (1997), “Inflation Forecast and Monetary Policy,” Journal of Money, Credit, and Banking, Vol. 29, No. 4, part 2, pp. 653–684. Davies, H. and D. Green (2010), Banking on the Future. The Fall and Rise of Central Banking, Princeton University Press. De Gregorio, J. (2007), “Defining Inflation Targets, the Policy Horizon and the OutputInflation Tradeoff,” Working Paper N° 415, Central Bank of Chile. De Gregorio, J. (2008), “La Gran Moderación y el Riesgo Inflacionario: Una Mirada desde las Economías Emergentes,” Estudios Públicos, N° 110, pp. 5–20, otoño. Galí, J. and L. Gambetti (2009), “On the Sources of the Great Moderation,” American Economic Journal: Macroeconomics, Vol.