More-aggressive-than-usual policy responses may be appropriate to avoid the negative implications of an encounter with the zero bound. Paradoxically, though, once the lower bound on interest rates is binding, a less-than-usuallyaggressive monetary policy response may be appropriate. I have tried to articulate this in FOMC meetings ever since we started down the path of quantitative easing, drawing on anecdotal reports from my CEO contacts and what I thought was common sense. But my arguments fell on deaf ears until my more learned counterpart at the San Francisco Fed, John Williams, produced a formal study that posited that the aggressive use of unfamiliar policy tools like quantitative easing and Operation Twist add to aggregate economic uncertainty and, if applied at all, should be deployed more cautiously than our more familiar tools.7 Large margins of error In general, the objective of monetary policy is to provide households and firms with an economic environment that makes it attractive to use money as medium of exchange and store of value. Since many private contracts, including labor and debt contracts as well as capital expenditure commitments, extend out several years, a multiyear policy perspective is needed. A multiyear perspective is especially important when the economy may encounter the zero bound. The explanation is that by interfering with the normal conduct of monetary policy, the zero bound increases the likelihood that policy will miss its objectives year after year in the same direction, so that the errors accumulate over time.
BIS central bankers’ speeches  5  multiyear contracts is a multiyear nominal stability. A policy that “lets bygones be bygones” from year to year may not achieve this kind of stability, especially when policy options can become constrained, in the short term, by the zero bound. A policy that takes a longer-term perspective and is properly communicated and executed – so as to instill confidence that monetary policy will hew to a 2 percent inflation target rather than fixate on the run-rate of the past four quarters or the outlook for the next four – may better supply the longer-term comfort that households and businesses need to plan and budget. Such a policy would reduce the uncertainty that monetary policy as it is currently conducted spawns and would be more effective in doing its part to assist in economic expansion.8 A dime between two nickels I hope this is enough to get a conversation started. I will now turn the microphone over to John Taylor. In doing so, I am reminded of Ross Perot’s quip when he was placed between Bill Clinton and George H.W. Bush for a predebate photograph in the 1992 presidential election. Noting that Mr. Perot was substantially shorter than the other two men, a reporter asked him how he felt. His reply: “I feel like a dime between two nickels.” In contrast, compared to John Taylor, I feel like an intellectual dwarf – a mere penny sitting on the dais next to John’s $ bill brain.