announce an explicit lower bound for its definition of price stability. in the literature there are also some economic arguments in favour of a slightly positive rate of inflation. first, it has been argued that the existence of downward nominal rigidity in wages implies that inflation is required to ensure downward flexibility of real wages, thereby allowing resources to be allocated efficiently across different economic sectors in response to changes in technology and consumer preferences. second, it has been put forward that a modestly positive rate of inflation is required to ensure that monetary policy can always engineer negative real interest rates, should this be required. there are good and well - known reasons not to overstate these arguments. at the same time, the definition of price stability chosen by the governing council allows for moderately positive inflation below 2 %. the governing council underlined the fact that price stability is to be maintained over the medium term. in the short term, the inflation rate can be influenced by one - off factors outside the control of the central bank, such as changes in indirect taxes or movements in commodity prices. moreover, monetary policy impulses exert their influence on the overall price level only with considerable time - lags. hence, monetary policy cannot avoid short - term deviations from inflation rates consistent with price stability. the two pillars of the monetary policy strategy of the eurosystem the intrinsic challenge for central banking is the need to look ahead. were monetary policy only to react when inflationary pressures are already visible, it would always be too late, as interest rate changes show their full impact on prices only after around six to eight quarters. moreover, it would have to react much more strongly than in the event of a timely action. the past experience with stop - go policies, widespread in the 1960s and 1970s, clearly illustrates the negative side effects in terms of a high volatility of inflation and output. a forward - looking monetary policy requires a structured approach in order to interpret and synthesise all the information relevant for an assessment of the outlook for price developments ; in other words, it requires a well - founded monetary policy strategy. the strategy of the eurosystem is based on two pillars, the first being a prominent role for money and the second a broadly based assessment of the outlook for price developments. to give money a prominent role in its monetary policy analysis is quite a natural thing for a central bank geared towards price stability to do, because inflation is ultimately a monetary phenomenon. the important role assigned to money is reflected in the announcement of a reference

ben s bernanke : american international group testimony by mr ben s bernanke, chairman of the board of governors of the us federal reserve system, before the committee on financial services, us house of representatives, washington dc, 24 march 2009. * * * chairman frank, ranking member bachus, and other members of the committee, i appreciate having this opportunity to discuss the federal reserve's involvement with american international group, inc. ( aig ). in my testimony, i will describe why supporting aig was a difficult but necessary step to protect our economy and stabilize our financial system. i will also discuss issues related to compensation and note two matters raised by this experience that merit congressional attention. reasons for our original lending decision we at the federal reserve, working closely with the treasury, made our decision to lend to aig on september 16 of last year. it was an extraordinary time. global financial markets were experiencing unprecedented strains and a worldwide loss of confidence. fannie mae and freddie mac had been placed into conservatorship only two weeks earlier, and lehman brothers had filed for bankruptcy the day before. we were very concerned about a number of other major firms that were under intense stress. aig's financial condition had been deteriorating for some time, caused by actual and expected losses on subprime mortgage - backed securities and on credit default swaps that aig's financial products unit, aig - fp, had written on mortgage - related securities. as confidence in the firm declined, and with efforts to find a private - sector solution unsuccessful, aig faced severe liquidity pressures that threatened to force it imminently into bankruptcy. the federal reserve and the treasury agreed that aig's failure under the conditions then prevailing would have posed unacceptable risks for the global financial system and for our economy. some of aig's insurance subsidiaries, which are among the largest in the united states and the world, would have likely been put into rehabilitation by their regulators, leaving policyholders facing considerable uncertainty about the status of their claims. state and local government entities that had lent more than $ 10 billion to aig would have suffered losses. workers whose 401 ( k ) plans had purchased $ 40 billion of insurance from aig against the risk that their stable value funds would decline in value would have seen that insurance disappear. global banks and investment banks would have suffered losses on loans and lines of credit to aig, and on derivatives with aig - fp. the