In all these occasions, once the asset prices reversed down, there was an abrupt relaxation of the monetary policy. 2 This implicit insurance, popularly known as the Greenspan put, certainly makes the creation of bubbles more likely. This strategy, which worked in some earlier episodes, failed miserably during the biggest collapse in decades. A monetary policy strategy that used to provide insurance to speculation in episodes of limited financial turbulence proved incapable of confronting a financial crisis of systemic proportions. This strategy to deal with bubbles is a prescription derived not from inflation targeting, but from a need to insure financial stability. In my view, financial stability must be addressed first with appropriate regulation of the financial system that limits the excesses we saw before the crisis. There may be situations in which it might be appropriate to deviate transitorily from an inflation targeting regime in order to ensure financial stability, but this must be an exception, which in normal times should not arise. I think a first lesson for the conduct of monetary policy is to avoid providing insurance to speculators, which creates enormous moral hazard problems. In emerging countries we have lived this, with much milder consequences, when we attempted to manage exchange rates disconnected from fundamentals for a prolonged period of time. Therefore, an examination of monetary policy and financial dislocations around the world suggests that the culprit of the current crisis was related more closely with the functioning of financial systems than with monetary policy.

Based on the most recent reading in September 2022, about a quarter of respondents have deflation expectations five years in the future, nearly as large as the share expecting inflation above 4 percent at the five-year horizon. Following the onset of the pandemic, aggregate uncertainty—which combines disagreement and individual uncertainty—increased but has also become more symmetric. Figure 4 shows the aggregate distributions of inflation three years in the future based on the SCE.14 Two-thirds of the widening of distributions reflect greater dispersion across respondents, and the remainder is due to greater uncertainty reported by individuals.15 Interestingly, the distribution of aggregate uncertainty before and during the first year of the pandemic was skewed to the upside, as seen in Figure 4. Since then, the rising share of those who report deflation expectations has caused the overall distribution to become more symmetric relative to the median. In terms of the uncertainty criterion, uncertainty does not increase linearly with the forecast horizon in the SCE. Figure 5 shows the distributions of aggregate uncertainty for one-, three-, and five-year-ahead inflation forecasts from September 2022. As Figure 5 shows, the distributions are very similar for the different forecast horizons. This seems consistent with the evidence that many respondents view the inflation surge as reflecting a unique set of developments.16 An additional, albeit indirect, measure of inflation uncertainty is provided by the distribution of expectations of interest rates from options.17 Although future interest rates depend on a variety of factors, the expectations about inflation are a key determinant.