relied on a loose form of calendar or date - based guidance, in which they committed to leave rates low for “ an extended period of time. ” in some cases, a more specific time frame was mentioned, such as mid - 2014 or mid2015. the commitment was not unconditional, however. there was a clear, if implicit, understanding that, if the state of the macroeconomy and the inflation outlook were to change materially, the central bank would respond appropriately. the bank of canada pioneered the use of conditional guidance in april 2009. 2 it committed to hold the policy rate at its effective lower bound through the second quarter of 2010, conditional on the outlook for inflation. the bank ’ s guidance succeeded in changing market expectations regarding the future path of interest rates, providing the desired stimulus and thereby underpinning a rebound in growth and inflation in canada ( chart 2 ). 3 in more recent applications, forward guidance has become more explicitly outcome - or databased, with some central banks identifying thresholds such as specific rates of inflation or unemployment which, if crossed, would prompt a reconsideration of their policy track. the second form of unconventional monetary policy employed by many central banks involves purchasing large amounts of government bonds or other financial instruments. “ quantitative easing, ” as it is generally known, is viewed as a complementary and more direct means of easing credit conditions, exerting immediate upward pressure on the prices of the assets that were purchased, as well as those of other assets, through a process of at the zero lower bound, interest rate risk is asymmetric : short - term rates can rise, but they cannot fall. this asymmetry causes the mean or expected outlook for short rates to be greater than the modal or most likely path. thus, guidance can lower long - term rates by reducing uncertainty about the future path of short - term rates, even if it does not change the modal expectation as to the duration at the lower bound. for a review of the evolution of forward guidance, see m. carney, “ monetary policy after the fall ” ( eric j. hanson memorial lecture, university of alberta, edmonton, 1 may 2013 ). see z. he, “ evaluating the effect of the bank of canada ’ s conditional commitment policy, ” discussion paper no. 2010 – 11, bank of canada, 2010 ; and m. woodford, “ methods of policy accommodation at the interestrate lower bound, ” paper presented at the jackson

because we “ put our money where our mouths were ” by extending the almost $ 30 billion exceptional liquidity programs we had in place for the duration of the conditional commitment. and it worked because it reached beyond central bank watchers to make a clear, simple statement directly to canadians. obviously the optimal policy path will differ for central banks, depending on their circumstances and mandates. for example, the federal reserve indicated at its september meeting that its policy rate could be expected to remain at exceptionally low levels until mid - 2015, and provided additional certainty with respect to its reaction function by linking future unconventional monetary policy to substantial improvements in the outlook for the u. s. labour market. further, it indicated that it will leave highly accommodative policy in place “ for a considerable time after the economic recovery strengthens. ” the fed also expanded its large - scale asset purchases, dubbed “ qe3, ” consistent with this enhanced forward guidance. 16 guidance and time inconsistency doing more may require overcoming the familiar monetary policy challenge of time inconsistency – but not as it has been conventionally understood. 17 today, to achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up. market participants may doubt the willingness of an inflation - targeting central bank to respect this commitment if inflation goes temporarily above target. these doubts reduce the effective stimulus of the commitment and delay the recovery. to “ tie its hands, ” a central bank could publicly announce precise numerical thresholds for inflation and unemployment that must be met before reducing stimulus. 18 this could reinforce the central bank ’ s commitment to stimulative policy in the future and thus enhance the stimulative impact of its policies in the present, helping the economy escape from the liquidity trap. further enhancing guidance may require a change in framework from our perspective, thresholds exhaust the guidance options available to a central bank operating under flexible inflation targeting. if yet further stimulus were required, the policy framework itself would likely have to be changed. 19 for example, adopting a nominal gdp ( ngdp ) - level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. this is because doing so would add “ history dependence ” to monetary policy. under ngdp u. s. federal reserve, federal open market committee press release, 13 september 2012. in the days before