The target range and the length of the policy horizon reflects that the Bank will tolerate deviations away from the target range, particularly if caused by temporary supply shocks that raise headline inflation and recognizes that a tradeoff exists between the length of the policy horizon and the volatility of output and employment. This raises several questions, such as: Is the present combination of a 2-4 target range for annual inflation and a 12-24 month policy horizon optimal? How flexible should the extent of the policy horizon to the type of shocks—temporary vs persistent—of supply vs demand? Is it advisable to review the length of the policy horizon as a way to consider asset prices or, in general, financial stability concerns in the conduct of monetary policy? (4)  Measurement and implications of inflation expectations  Of all monetary schemes, the one based on inflation targeting is the most sensitive to private expectations regarding future inflation, because this is the main anchor of inflation and, together with output gaps, is also the main determinant of medium-term inflation. In addition, central banks have no direct control on such expectations. Inflation is the result of pricing decisions of a large number of decentralized agents, whose actions are significantly influenced by their views of what the future aggregate inflation rate will be. Recognizing this, in our Central Bank we assign great weight to direct measures of expected inflation and to inflation compensation derived from the differentials between nominal and inflation-indexed interest rates.

See, for example, Crockett, A. (2000), “Marrying the  micro- and macroprudential dimensions of financial stability”, BIS speeches, 21 September; Borio, C (2003), “Towards a macroprudential framework for financial supervision and regulation?”, CESifo Economic Studies, 49: 181–216. 5 See ESRB (2014), op. cit. 6 See, for example, Recommendation of the European Systemic Risk Board of 22 December 2011 on the macro-  prudential mandate of national authorities (ESRB/2011/3); Recommendation of the European Systemic Risk Board of 4 April 2013 on intermediate objectives and instruments of macro-prudential policy (ESRB/2013/1); the ESRB response to the European Commission’s Consultation Document on the “Review of the EU Macroprudential Policy Framework”; and the ESRB handbook on operationalising macroprudential policy in the banking sector. 7 See the ESRB’s website for a breakdown by country. The ESRB’s annual review of macroprudential policy in the  EU provides a detailed description of these measures. 8 Belgium, Denmark, Finland, Luxembourg, the Netherlands and Sweden. 9 Czech Republic, Germany, France, Iceland and Norway. 10 Hellwig, M (2009), “Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial  Crisis”, De Economist, 157(2): 129–207. 11 3/4  BIS central bankers' speeches  11 See ESRB (2018), Macroprudential provisions, measures and instruments for insurance, November. For recent  work on the topic by the European Insurance and Occupational Pensions Authority (EIOPA), see, for example, EIOPA (2019), Discussion Paper on systemic risk and macroprudential policy in insurance, March. 12 ESRB (2019), Features of a macroprudential stance: initial considerations, April. 4/4  BIS central bankers' speeches