Low policy rates boost credit growth and asset prices in conventional accounts of the monetary transmission mechanism, but other work has also highlighted the potential for low safe interest rates to  2  The potential role of high global savings and the consequent downward pressure on long-term interest rates is another factor often mentioned (Bernanke, 2005). 2  BIS central bankers’ speeches  encourage a shift into riskier assets (for example Claudio Borio and Haibin Zhu, 2008)3. While the contribution of monetary policy to the crisis is controversial – I shall say a bit more on this later – I find plausible the idea that the long period of relative macroeconomic stability lulled investors into a false state of security. This leads to my second lesson from the crisis: the achievement of price stability does not guarantee the maintenance of financial stability and, without further measures, may possibly even compromise it. My next lesson follows on from this and relates to deficiencies in our analytical framework. The canonical macroeconomic model for thinking about the design of monetary policy is that of the New Keynesian synthesis (see Richard Clarida, Jordi Gali, and Mark Gertler, 1999; Michael Woodford, 2003). This focuses on the consequences of real and nominal rigidities in goods and labour markets, which give rise to a short-run trade-off between inflation and activity. The dynamic stochastic general equilibrium models in use in many central banks typically embody this synthesis, though usually with quite a few knobs and whistles added on.

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