olli rehn : eternal challenges in monetary policy speech by mr olli rehn, governor of the bank of finland, at the 2023 bank of japan and institute for monetary and economic studies ( boj - imes ) conference, hosted by the institute for monetary and economic studies, tokyo, 1 june 2023. * * * accompanying presentation of the speech thank you, athanasios, and my sincere thanks to governor kuroda for the invitation. this conference, now under the firm leadership of governor ueda, continues to be a key event after 40 successful years. let me make two points on what i would call, neither old nor new, but perennial, eternal challenges in monetary policy. i will start with inflation expectations, and then discuss our monetary policy stance. the heavy cost of a de - anchoring of inflation expectations is one of the most agreed upon issues in central banking. after all, steering inflation towards our targets is largely about steering inflation expectations. slide 1 in the euro area, the inflation outlook continues to be too high for too long. although most measures of longer term inflation expectations currently stand at around our 2 % target, some indicators have edged up and warrant continued monitoring. a lasting rise in inflation expectations is an upside risk to inflation, also over the medium term. persistently high inflation rates are risky, particularly since they could make inflation expectations adaptive. this would be a dangerous development and must be decisively avoided. thanks to the increased extraction of information from micro data, we are now learning more about the formation of inflation expectations. professor weber, who is no stranger to the bank of finland, has shown us that we should analyse inflation expectations more deeply to gain a more profound understanding. this said, when going from the macro to the micro level, the issues tend to become more complex. this goes for survey data, as well, in that we also need a fuller psychological interpretation of expectation formation to better understand survey behaviour. my second point is on the policy stance in the current context. for central banks, there are substantial common global denominators. so, i found it particularly interesting when, yesterday, professor obstfeld drew our attention to the importance of global factors in determining real rates. in his recent work, professor obstfeld has also pointed to a risk that central banks may collectively go too far, as their restrictive policies would reinforce each other. 1 / 2 bis - central bankers'speeches it is fair to note that the

also means that the tool kit of monetary policy is more limited than for a single - country central bank. it follows that the moral hazard considerations related to central bank actions in a monetary union are very different in comparison to a single - country central bank. even in a country for example, see christiano, eichenbaum and rebelo ( 2011 ) and the references therein. see brunnermeier, eisenbach and sannikov ( 2012 ) for a recent survey of this literature. two new papers that take the nonlinearities seriously are benhabib, evans and honkapohja ( 2012 ), and fernandez - villaverde, gordo, guerron - quintana and rubio - ramirez ( 2012 ). these papers can be consulted for references to the other literature. bis central bankers ’ speeches with its own central bank, a government may, for political reasons, be occasionally tempted to resort to monetary financing of fiscal costs, even though the inflationary and financial repression cost will fall on its own taxpayers. but surely such temptation is stronger when the bulk of the inflationary cost falls on not just domestic taxpayers but also other countries ’ taxpayers. when the emu was established, it was often suggested that current account positions between members of a currency union do not matter. there cannot be balance - of - payments crises within a currency union. the financial crisis has proved that this view is fallacious. the sovereign debt crisis carries many of the hallmarks of a balance - of - payments crisis. it is by now obvious that a central bank whose job it is to equalize monetary conditions between the crisis countries and the safe - haven countries will inevitably face a formidable task. the tradeoffs the ecb has faced during the crisis range from what is necessary to maintain a sufficient functioning of monetary policy transmission mechanism for the single monetary policy to avoidance of making monetary policy a vehicle of fiscal transfers. the path between the two is full of difficulties, and only time will tell whether the euro system succeeded. v. conclusions if one looks at the history of central banking, it is evident that the objectives of central banking and their balance have changed over time. this movement depends on what are the important objectives of economic policies. before the current crisis the emphasis was on inflation and, depending on the mandate, also more generally on macroeconomic stability. this pre - crisis focus on price stability came in part as a response to the great inflation of the 1970 ’ s. the