2008, fomc inflation forecasts, for both core and headline inflation, become available four times each year in the summary of economic projections ( see, for example, board of governors of the federal reserve system ( 2009 ), “ minutes of federal open market committee, january 9, 21, and 29 – 30, 2008, ” press release, february 20 ). in the same spirit, we also replace the output gap as measured retrospectively by the frb / us model with the output gap from that model as measured in real time. this change has no significant effect on the policy prescriptions over most of the period. have garnered much support among monetary specialists. in contrast, slide 4 shows that the version of the taylor rule based on forecast inflation ( in green dots ) explains both the course of monetary policy earlier in the past decade as well as the decision not to respond aggressively to what did in fact turn out to be a temporary surge in inflation in 2008. this comparison suggests that the taylor rule using forecast inflation is a more useful benchmark, both as a description of recent fomc behavior and as a guide to appropriate policy. although monetary policy from 2002 to 2006 appears to have been reasonably consistent with the federal reserve ’ s mandated goals of maximum sustainable employment and price stability, we have not yet addressed the possibility that accommodative policies – though perhaps appropriate for achieving medium - term inflation and output goals – inadvertently contributed to the housing bubble. i turn now to that question. monetary policy and the housing bubble to set the stage for the discussion, slide 5 shows the annual increase in nominal house prices from 1978 to the present. 11 after some years of slow growth, u. s. house prices began to rise more rapidly in the late 1990s. prices grew at a 7 to 8 percent annual rate in 1998 and 1999, and in the 9 to 11 percent range from 2000 to 2003. thus, the beginning of the run - up in housing prices predates the period of highly accommodative monetary policy. shiller ( 2007 ) dates the beginning of the boom in 1998. on the other hand, the most rapid price gains were in 2004 and 2005, when the annual rate of house price appreciation was between 15 and 17 percent. thus, the timing of the housing bubble does not rule out some contribution from monetary policy. to try to assess the importance of that possible contribution, in the remainder of my remarks i will consider briefly two related questions. first, the cumulative

= 0. 0109 ). conclusions and policy implications my objective today has been to review the evidence on the link between monetary policy in the early part of the past decade and the rapid rise in house prices that occurred at roughly the same time. the direct linkages, at least, are weak. because monetary policy works with a lag, policymakers ’ response to changes in inflation and other economic variables should depend on whether those changes are expected to be temporary or longer - lasting. when that point is taken into account, policy during that period – though certainly accommodative – does not appear to have been inappropriate, given the state of the economy and policymakers ’ medium - term objectives. house prices began to rise in the late 1990s, and although the most rapid price increases occurred when short - term interest rates were at their lowest levels, the magnitude of house price gains seems too large to be readily explainable by the stance of monetary policy alone. moreover, cross - country evidence shows no significant relationship between monetary policies and the pace of house price increases. what policy implications should we draw? i noted earlier that the most important source of lower initial monthly payments, which allowed more people to enter the housing market and bid for properties, was not the general level of short - term interest rates, but the increasing use of more exotic types of mortgages and the associated decline of underwriting standards. that conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary. stronger regulation and supervision aimed at problems with underwriting practices and lenders ’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates. moreover, regulators, supervisors, and the private sector could have more effectively addressed building risk concentrations and inadequate risk - management practices without necessarily having had to make a judgment about the sustainability of house price increases. the federal reserve and other agencies did make efforts to address poor mortgage underwriting practices. in 2005, we worked with other banking regulators to develop guidance for banks on non - traditional mortgages, notably interest - only and option - arm products. in march 2007, we issued interagency guidance on subprime lending, which was finalized in june. after a series of hearings that began in june 2006, we used authority granted us under the truth in lending act to issue rules that apply to all high - cost mortgage lenders, not just banks. however, these efforts came too late or