And, on the other hand, Bernanke B. and M. Gertler, 2001, ‘Should central banks respond to movements in asset prices’, American Economic Review, vol 91, no.2; Issing, O. ,2004, ‘Financial integration, asset prices and monetary policy’; Kohn, D., 2006, ‘Monetary policy and asset prices’, Remarks at ‘Monetary Policy: A Journey from Theory to Practice”, a ECB colloquium held in honour of O. Issing; and Posen, A., 2006, ‘Why central banks should not burst bubbles’, Institute of International Economics Working Paper 01/2006. For example, the MPC Minutes February 2002, December 2002 and February 2003. 29  10  For example, Borio, C. and P. Lowe, 2002, ‘Asset price, financial and monetary stability: exploring the nexus’, BIS Working Papers number 114. BIS Review 46/2006  Summary It is next to certain that my views on many of the issues covered in these remarks will continue to develop as the MPC confronts new challenges. It would be hard to be serious about policymaking without learning. But for the time being, two key threads run through what I have said. The first is the absolutely vital task of anchoring medium-to-long term inflation expectations in line with a clear target. That just cannot be taken for granted. The second is the importance of clear and clean communications about objectives. On that front, we should not kid ourselves that households and firms are studying our every utterance or examining in detail the economy in which they live and work.
Reflecting the achievements of this university, our models have a well-defined steady state equilibrium for the real economy; well-defined steady state nominal properties, typically an inflation rate; and forward-looking rational expectations, that is to say modelconsistent expectations. The second of these characteristics means that a nominal target is always achieved in the medium-to-long run. And the third means that the model’s agents know that; ie they know now and behave – set wages and prices – accordingly, so that in these mainstream models the target is achieved over cyclical frequencies too. Typically, nominal things enter via inflation expectations, and they are pinned down in the stylised, model economy by a policy rule of the kind I sketched earlier, expressed in terms of an official interest rate (the price of base money). But just in case it were thought that the “problem” of models promising the policymaker success stems from the crime of ignoring money quantities, I should make it clear that that is not so. It would not make a fundamental difference in policymakers’ modern-macro models if nominal stuff entered via a money quantity, with the policy rule being specified as a money-supply growth rate. So-called velocity shocks to the demand for money would cause deviations from an inflation target in the short run, but everything would ultimately settle down nicely – because that assumption would be built in to the model’s long-run properties (in this instance via a demand-formoney equation that was imposed as stable over the long run). I’m exaggerating a bit.