ignazio visco : the financial crisis and economists ’ forecasts commencement address by mr ignazio visco, deputy director general of the bank of italy, to the students of the master in public economics at the faculty of economics, la sapienza university, rome, 4 march 2009. while i alone am responsible for the views put forward in this paper, i wish to thank fabio busetti, michele caivano, eugenio gaiotti, alberto locarno, sergio nicoletti altimari, patrizio pagano, fabio panetta and stefano siviero for discussions on its various parts and for their practical assistance. the original speech, which contains various links to the documents mentioned, can be found on the bank of italy ’ s website. * 1. * * introduction it is perhaps early to draw lessons from the crisis that has hit the global economy. the crisis appears severe and widespread, its effects far - reaching and long - lasting. measures of various kinds have been taken or are in the process of being taken regarding monetary policy, the use of public resources and the revision of rules and institutions on which the proper functioning of the markets and the operation of financial intermediaries depend. the present is undoubtedly a period of maximum efforts on the part of economic policy and overall political action, efforts that are directly proportional to the seriousness of the crisis. but this is also a moment in which the interpretative models used in analyzing our economies start being reconsidered and attempts are being made at identifying the reasons underlying the failures of markets, economic policies and economists ’ forecasts. besides, this is also necessary in order to better define interventions – global, substantial, focused and lasting – aimed at overcoming the crisis and, as far as possible, preventing, with the design of new rules, new institutions and new policies, such serious instability from occurring again. if overcoming the crisis will be arduous and complex, the process of revising the theoretical and quantitative frameworks of analysis, and the domestic and supranational guidelines and instruments of economic and financial policy will be equally difficult and laborious. to begin, one can and certainly must ask how seriously economic analysis, together with forecasting models, has failed, but also why economic policy, in its various forms, has been so late to respond to the alarms of economists ’ analyses and forecasts. this is the subject i should like to address briefly in what follows, while anticipating an obvious answer :

the effective pursuit of our goal. i remain unpersuaded that explicit numerical inflation targets are a key characteristic that distinguishes behavior among the world's central banks. despite the various public characterizations of the form of monetary policy regime, the federal reserve and most other central banks generally pursue price stability and, consistent with that goal, ease when economic conditions soften and tighten when they firm. that said, i am certain this will remain a topic of lively discussion here and at other monetary forums in years to come. participants on all sides of that debate will be well served by keeping open minds and remaining attentive to the evidence as events unfold and practices evolve. debates on the relative merits of asset price targeting also will continue and possibly intensify in the years ahead. the configuration of asset prices is already an integral part of our evaluation of the large array of forces that influence financial stability and economic growth. but given our current state of knowledge, i find it difficult to envision central banks successfully targeting asset prices any time soon. however, i certainly do not rule out that future work could improve our understanding of asset price behavior, and with it, the conduct of monetary policy. * * * i will miss debates on such topics with members of the federal open market committee and with the staffs of the board and the banks. the federal reserve is a remarkable institution. aside from its technical expertise in supervision and regulation and in overseeing an increasingly complex payments system, it combines for monetary policy an academic sophistication and a market - sensitive understanding that is brought to bear in formulating the tie between instruments and the goals of monetary policy. surely difficult challenges lie ahead for the fed, some undoubtedly of our own making, and others that will be thrust on us by market or other forces. having been exposed to the inner workings of this extraordinary institution for nearly two decades, i have little doubt that my successors, and theirs, will continue to sustain the leadership of the american financial system in an ever - widening global economy.