That took the form of explicit guidance to depress expectations of future interest rates; and largescale asset purchases financed by the issuance of reserves – colloquially known as quantitative easing. Let me start with forward guidance, which has particularly attracted academic interest. 1 By holding rates “lower for longer”, the central bank can implement an optimal, yet time-  1  See e.g. Paul Krugman (1998), “It's baaack: Japan's slump and the return of the liquidity trap.” Brookings Papers on Economic Activity, pp.137–205; Gauti Eggertsson and Michael Woodford (2003), “The Zero Bound on Interest Rates and Optimal Monetary Policy.” Brookings Papers on Economic Activity 34.1, pp.139–235; Campbell, J. R., Evans, C. L., Fisher, J. D., & Justiniano, A. (2012), “Macroeconomic Effects of Federal Reserve Forward Guidance.” Brookings Papers on Economic Activity, pp.1–80. BIS central bankers’ speeches  1  inconsistent, path for rates that boosts demand today, by lowering future nominal rates and by raising future inflation. It is time inconsistent because, when the future comes, it will no longer seem appropriate to go through with the promised inflationary episode. Because policy committees cannot tie the hands of their successors, I do not believe such timeinconsistent strategies can be credibly implemented other than over rather short horizons. Of course, all central banks provide guidance regarding the economic outlook and the factors determining policy so as to influence expectations. Several central banks, such as the Reserve Bank of New Zealand and the Swedish Riksbank, go as far as providing forecasts of their own future policy decisions.
While the years before the crisis were characterised by stability in the evolution of the market for goods and services, asset markets were anything but stable. In particular, there was a massive expansion in  4  BIS central bankers’ speeches  credit, particularly within the financial system in many of the advanced economies, accompanied by upward pressure on a range of asset prices, including real estate. There was a boom in asset markets, even if there was no corresponding boom in the real economy. To some people, the relatively low level of interest rates necessary to maintain price stability was instrumental in generating this boom in credit and asset prices by encouraging an aggressive search for yield. While there is some truth in this charge, I think it would be a mistake to conclude that monetary policy was the sole, or even the prime, cause of the crisis. Several factors coincided to form a potent cocktail. There were other factors that depressed the yield on safe assets, including high savings rates in China and a more general demand for US Treasuries as emerging economies accumulated larger stocks of foreign reserves in the wake of the Asia Crisis. Equally important, in my view, was the impact of the Great Moderation itself on risk-taking behaviour, as low volatility encouraged an underestimation of the likelihood and severity of adverse tail risks crystallising. Seen in this light, the Great Moderation sowed the seeds of its own destruction.