But that is rarely possible in practice, other than perhaps a very short distance ahead. 8  See Woodford (2012). 9  See Carney (2012). 4  BIS central bankers’ speeches  The difficulty of utilising this particular policy channel is probably not a great issue in normal times. But it looms larger when policy is constrained by the zero lower bound on interest rates. In such circumstances – and assuming that alternative policies, such as quantitative easing, are unavailable or ineffective – an ability to exploit this policy-expectations channel becomes much more valuable, as the commitment to hold policy loose in the future feeds back onto aggregate demand today by reducing expected future real interest rates. This comes about both through a low future nominal interest rate and a higher future rate of inflation because policy is held “loose for long”. The intent of such a loose-for-long strategy is in some ways similar to quantitative easing, as both reduce interest rates further down the yield curve. But the former does so by changing the path of risk-free rates at the near end of the yield curve, while the latter operates mainly through variations in the term premium further out along the yield curve brought about by changes in relative asset supplies. Moreover, the loose-for-long approach partly works by raising future inflation, which is not an objective of quantitative easing.
Of course, the world is much more complex and risks materialize over long periods of time in response to many factors, and there are important differences between social and private outcomes, but I think it is helpful to think through these types of signals ex ante. By making predictions and assessing whether observed outcomes are consistent with those predictions, we can better understand the complex dynamics in financial institutions and develop better policy. Resource Efficiency Finally, I’ll emphasize that I have focused on one specific type of policy efficiency that looks at the ability to achieve multiple objectives. Alternatively, one could think about efficiency more directly in terms of resources and burden, both on the private sector and the official sector. For example, the Federal Reserve aims to minimize compliance burden while achieving its policy goals.15 That perspective is about allocative efficiency of scarce resources and the deadweight loss associated with the misallocation of those resources. As part of the official sector, we have an obligation to be good stewards of resources and should always try to achieve a given set of policy objectives in the least-cost manner. Conclusions To conclude, I have suggested a simple framework to help distinguish changes in policy to achieve a different level of intermediation and an acceptable level of risk from changes in policy to increase efficiency. The first reflects the preferences of policymakers, and the second should be a standing goal.