During the recession we have been trying very hard to stimulate the economy – but always with an eye on inflation returning to the 2% target in the medium run, as we are required to do. If QE has contributed to inflation still being somewhat over-target at around 2 ½% now, that seems to me a much better outcome than the alternative of a deeper recession and a greater risk of deflation. We have had our critics over the past few years and an open debate on monetary policy is to be welcomed. But I have not heard anyone suggest a more convincing or attractive policy stance for monetary policy than that which we have pursued. The question now is what we should do with monetary policy as these shocks work their way out of the system. It feels as if monetary policy has done well to underpin the economy and to stop recessionary forces from gaining the upper hand. But it hasn’t been sufficient to generate a return to trend growth yet, let alone any catch up. The reason may be in the real balance sheet adjustments that I have described. Low interest rates and increases in the money base make the economy very liquid. Those with excessive debt levels can take their time to adjust in an orderly fashion.
BIS Review 161/2010  7