question would be, “ what is the relationship between low interest rates or long periods of accommodative monetary policy and the emergence of bubbles? ” here it is important to keep in mind the behavior of market participants as professor rajan has argued previously. 2 institutional investors, in many cases, develop their investment strategies targeting a nominal rate of return, taking into consideration past experience. insurance firms and pension funds often commit to a fixed rate of return to policy holders. since investment manager fees are linked to the size of assets under management, managers would aim to raise nominal rates of return to attract customers. these lead to search for yield tendencies or a more active risk taking stance in a low interest rate see white ( 2009 ). this paragraph draws on rajan ( 2010, ch. 5 ). environment, and in the build - up to the recent crisis, supported the growth of sub - prime related securitization with high ratings and surprisingly high nominal returns. investors had either knowingly or unknowingly taken on large credit and liquidity risk. such behavior had been amplified in the low interest rate environment where liquidity was plentiful. “ tail risks ” which were hard to detect in such an environment were piling up in investor portfolios and financial institution balance sheets. another element that would strengthen such activity would be the expectation that a low interest environment and accommodative monetary policy would continue. this would be influenced by multiple elements such as economic conditions, inflation expectations and the central bank policies. since the 1990s, inflation targeting was introduced in many countries as a framework to enhance transparency and accountability of monetary policy. this helped to anchor inflation rates as well as inflation expectations. at the same time, due to the design of this framework, markets and economists began to narrowly focus on the output gap and inflation rate in assessing the future path of monetary policy. in a stable inflation environment, this tended to create search for yield tendencies by heating the expectation that very low interest rates will continue. arguments against leaning against the wind there are various arguments against the view that monetary policy should play a role in leaning against the wind. let me raise two here. one argument would be that it is difficult to detect asset price related bubbles. the counter argument would be that higher asset prices per se are not the problem, but rather the buildup of imbalances such as excessive leverage and maturity mismatches which are interlinked with the large rise in asset prices are the problem.

on its implementation. 5 it has enhanced the transparency and accountability of monetary policy in many countries and has helped improve public awareness of the price stability goal of monetary policy. however, looking back to the period as the bubble accumulated, i have the impression that a literal and narrow understanding of “ inflation targeting ” going beyond its original intention gradually took hold. though perhaps not acknowledged, this began to constrain the flexible implementation of monetary policy based on overall macroeconomic and financial conditions. once a narrow understanding becomes engrained in the public mind, it will be quite difficult for the central bank to move beyond this narrow boundary and to act flexibly to an evolving situation, such as a situation where imbalances which could harm long - term growth may be accumulating, although the inflation rate itself is stable. that is why the bank of japan has introduced a framework which incorporates the positive elements of inflation targeting while trying to avoid the possible pitfalls. we publish a numerical definition of price stability which we call “ understanding of medium - to long - term price stability ”, and in order to avoid the possible pitfalls, adopted a framework based on two perspectives. under the first perspective, we assess whether the main scenario for the future path of the economy and prices over a two year time horizon is consistent with price stability while achieving sustainable growth. under the second perspective, we examine various upside and downside risks associated with the main scenario. a more extended time horizon is also assessed. as the experience of the bubble and its burst shows, we need to consider an event with low - probability but extremely high costs. a third dimension is the global aspect of monetary policy. the developments before and after the crisis have reconfirmed the extent of globalization of the world economy and financial system. although monetary policy is only one aspect, monetary conditions especially in major currency areas influence the behavior of market participants and thus global capital flows. for example, during the credit bubble period till 2007, the current account imbalance for the euro area was quite small, that is to say, investments and savings in the region were generally balanced. however, the increase in gross cross - border lending during the mid2000s by the banking sector was quite dramatic. the increase in lending was substantial not only toward eastern and central europe but also to asia, and european banks have become the largest overseas creditors. the yen carry trade was also a form of large capital flows. in the traditional treatment of monetary policy transmission mechanism, the bank lending channel was