4  Several central banks that do not call themselves inflation targeters effectively do conduct flexible inflation targeting, although they may not be quite as transparent about their inflation target, the role of stability of the real economy, etc. 5  See, for instance, Taylor (2007). 6  See Bean (2009) for an extensive and excellent discussion of the crisis, including the credit expansion and housing boom, the macroeconomic antecedents, the distorted incentives, the information problems, the amplification and propagation of the crisis into the real economy, the policy responses and the lessons for monetary policy and economics generally. The Bank for International Settlements (2009) provides a more detailed account of the possible macro- and microeconomic causes of the crisis. 2  BIS Review 16/2010  incentives to exercise less due diligence in loan origination because of securitisation and to conduct regulatory arbitrage by setting up off-balance-sheet entities, which for various specific reasons ended up still effectively remaining on the balance sheet. There were also distorted incentives for traders and fund managers to take excessive risks because of myopic and asymmetric remuneration contracts. There were eventually enormous information problems in assessing the risks of extremely complex asset-backed securities, and there was a huge underestimation of the potential for correlated systemic risks. None of these causes had anything to do with monetary policy, except that monetary policy may have contributed to the Great Moderation. Regarding the role of Federal Reserve monetary policy in the crisis, there are two relevant questions.

Second, over the past decade, inflation in the United States has been below our 2 percent longerrun target most of the time, and a number of measures of inflation expectations have drifted down in recent years.3 It is important to note that these first two observations are closely connected, as emphasized in the paper with Thomas Mertens that I presented at last year’s Hoover conference. In a world of 1/3  BIS central bankers' speeches  low r-star and a lower bound on nominal interest rates, a standard inflation targeting approach can lead to inflation and inflation expectations that are anchored below the targeted level.4 Third, during the long economic recovery following the 2007–09 recession, we saw the unemployment rate reach 50-year lows without causing an undesired rise in inflation. Structural changes in the economy—and in particular the labor market—have greatly expanded the level of employment that can be maintained without creating inflationary pressures. But, changes like those are hard to see in real time, making estimates of the natural rate of unemployment or other barometers of the economy’s potential inherently uncertain and subject to change.5  Evolution in Our Thinking One clear lesson is the critical importance of formulating a policy approach that effectively and consistently keeps longer-run inflation expectations anchored at 2 percent. Perhaps the most notable change we announced to our framework was explicitly describing success in terms of achieving inflation that averages 2 percent over time.