The expectation of lower interest rates in the future lowers yields on bonds and thereby fosters more favorable financial conditions overall. This will allow the stimulus to pick up steam, support economic growth over the medium term, and allow inflation to rise. These first two conclusions featured in my paper with Dave Reifschneider from 2000. In that paper, these ideas were described as modifications of an otherwise standard Taylor rule for monetary policy. The “forward-looking adjustment” to the Taylor rule illustrated the idea of moving in advance of a downturn to provide timely stimulus. The “backward-looking adjustment” illustrated the idea of keeping interest rates lower for longer. Finally, policies that promise temporarily higher inflation following ZLB episodes can help generate a faster recovery and better sustain price stability over the longer run.5 In model simulations, these “make-up” strategies can mitigate nearly all of the adverse effects of the ZLB. One particular benefit is that such strategies can be highly effective at keeping inflation near the target on average, thereby anchoring inflation expectations at the desired level. The Gravitational Pull of the ZLB But why are these measures so important close to the ZLB? The Fed has two goals: maximum employment and price stability. Our goal for prices—as I’m sure you’re aware—is two percent. The short answer is, in order to achieve our goals. The long answer centers on inflation and inflation expectations. I’m going to give you the long answer! In the last decade it’s proven particularly challenging to keep inflation at our two percent goal.

Last but not least, I will share my views on good policy preparations and highlight the importance of policy collaborations, so that we, collectively, could better withstand the impact of the crisis going forward. Part I: Major developments that have contributed to the past global financial crisis Ladies and Gentlemen, looking back on what we have experienced in the past decade, the recent crisis has caused tremendous impacts with repercussions at the global level. On a more positive side, however, the crisis has revealed three major developments in the financial system, which have shaded some light on the inadequacy of existing policy framework for our future preparations. First is innovation, in response to the shift in the global financial system landscape. The sophisticated financial instruments have been developed to serve rising demands from all types of investors with different risk-return appetites. However, such a creation has resulted in products that disguised the genuine financial risks. Moreover, systemic risk stemming from complex nature of such products have led to increasing contagious consequences in global economic and financial system. Second is the institutional shift represented by an increasing role of non-banks and shadow banks, especially in some Advanced Economies. This has long been a trade-off for policymaking between economic and social considerations. On one hand, the shadow banking sectors undoubtedly provide financial opportunity to those with limited access. This institutional development also has encouraged higher competition in the financial system, leading to greater efficiency.