A solution that at one point in time matches the requirements made of us will perhaps not work at all when conditions change. And the world around us is of course anything but static. Then there is also a measure of “learning by doing” in this. From unchanged repo rate… Up to October 2005 our inflation forecasts were made under the assumption that the policy rate would not change during the forecast period. The advantage of this method was that it illustrated in a simple manner when there was reason to change the policy rate. If the forecasts showed that inflation two years ahead would be lower than two per cent, this was a signal that the interest rate needed to be cut. If inflation would be higher, the interest rate usually needed to be raised. This rule was easy to understand and was therefore a good educational tool. This characteristic was particularly important when the rule was introduced. It was a question of winning back confidence in monetary policy and anchoring inflation expectations around the new target of two per cent. To succeed in this it was necessary for households, companies and the financial markets to understand the motives behind the monetary policy decisions. Here the simple rule probably played an important role. However, there were also considerable disadvantages. For instance, it is not a particularly realistic scenario for the policy rate to remain unchanged a couple of years ahead. It was therefore difficult to make forecasts that were totally coherent.
Jean-Claude Trichet: The great financial crisis – lessons for financial stability and monetary policy Introductory remarks by Mr Jean-Claude Trichet, President of the European Central Bank, at the Colloquium in honour of Mr Lucas Papademos, Vice-President of the European Central Bank, Frankfurt am Main, 20 May 2010. *  *  *  Ladies and gentlemen, Introduction The subject of this colloquium – “the great financial crisis”– could be no other since Lucas Papademos’ tenure will be remembered for the immense challenges for financial stability and monetary policy that have arisen since the trigger of the subprime crisis in 2007. Lucas played a key role at both the global and European levels in tackling these challenges. He was among those who were prescient about the considerable build-up of risks in the years before the crisis. He placed significant efforts in developing and adapting financial stability analysis to the fundamental and far-reaching changes in the financial system we have witnessed in the past decade, particularly as a result of increasing financial integration and innovation. When the crisis unfolded, Lucas was one of the foremost policy-makers in devising the actions required to stabilise the financial system. He also played a substantial part in setting the ground for regulatory reform, namely through his participation in the Financial Stability Forum, later Board, and in several European and Eurosystem fora, a number of which he chaired himself.