So a price-level targeting regime which specifies that prices should grow at x per cent a year ought to lead to fewer instances in which the ZLB on interest rates bites than does an inflation targeting regime with a target rate of x per cent. This proposition is demonstrated formally by Eggertsson and Woodford (2003). It is, though, worth pointing out that there may be times when having a price-level target is likely to be unhelpful. For instance, consider the present case of the United Kingdom, where upward shocks to oil prices and indirect taxes and a substantial depreciation of sterling have led to inflation running consistently above the 2 per cent target, but at a time when the economy has also been subject to an adverse demand shock which has opened up a substantial margin of spare capacity. Price-level targeting would dictate that this excess inflation must subsequently be unwound. Consequently, inflation expectations would be lower and real interest rates higher. That in turn would exacerbate the downward pressure on demand, worsening the constraint of the ZLB. The theoretical superiority of price-level targets over inflation targets hinges on the forwardlooking nature of expectations. If expectations are not forward-looking, then their automatic stabilising feature is lost. And the presence of inertia in the inflation process also reduces the relative superiority of price-level targets. In particular, if a significant fraction of firms set their prices on the basis of past inflation, then it becomes optimal to permit some drift in the pricelevel path in response to shocks.
But the sharp increases in a range of credit spreads from the onset of the crisis in August 2007, and especially after the collapse of Lehman Brothers in the Autumn of 2008, meant that policy rates had to fall sharply merely to  3  8  Though in any case, the Bank of England’s asset purchases are indemnified against loss by HM Treasury. BIS Review 111/2010  maintain the pre-existing levels of key borrowing rates, 4 let alone lowering them in order to stimulate aggregate demand to counteract the substantial contraction over 2008 Q4 and 2009 Q1. As a result, many monetary policymakers soon found themselves with policy rates at, or near, the zero interest rate lower bound (ZLB) and were forced to turn to other means to inject further monetary stimulus. There are two 5 main options facing a central bank when it nears the ZLB, both of which seek to depress longer-term interest rates and raise asset prices: committing to keep future policy rates low; and reducing the spreads of longer-term interest rates over expected policy rates through asset purchases financed by money creation. In the canonical New Keynesian/New Classical DSGE model, being able to commit to keep policy rates low for a sustained period is the only way of further stimulating the economy at the ZLB, as the impact of monetary policy is completely summarised by the current and future path of the policy rate.