great recession. but let me join the crowd and begin doing so. lesson 1 : reaching the zero interest lower bound is not the end of expansionary monetary policy until this crisis, the textbooks said that when the nominal interest rate reaches zero, monetary policy loses its effectiveness and only fiscal policy remains as an expansionary policy instrument – the pure keynesian case. now we know that there is a lot that the central bank can do to run an expansionary monetary policy even when it has cut the central bank the qualification relates to the fact that some researchers, for example clark warburton, had emphasized this view before the publication of friedman and schwartz ’ s work. ( see for example the papers reprinted in clark warburton, depression, inflation, and monetary policy ; selected papers, 1945 – 1953, johns hopkins press, 1963. ) milton friedman and anna j. schwartz, a monetary history of the united states, 1867 – 1960, princeton university press, 1963, p. 30. ben s. bernanke, “ non - monetary effects of the financial crisis in the propagation of the great depression, ” american economic review, 73 ( june 1983 ), pp. 257 – 76. bis central bankers ’ speeches interest rate essentially to zero – as did the fed, the bank of england, the bank of japan, and other central banks during this crisis. in the first instance there is the policy of quantitative easing – the continuation of purchases of assets by the central bank even when the central bank interest rate is zero. although these purchases do not reduce the short - term interest rate, they do increase liquidity. further, by operating in longer - term assets, as in qe2, the central bank can affect longerterm interest rates, which may have an additional impact on the private sector ’ s demand for longer - term assets, including mortgages and corporate investment. during the crisis several attempts were made to calculate how much quantitative easing was needed at a particular point in time. the calculation used a taylor rule to calculate what the ( negative ) interest rate should have been in the given circumstances, combined that with an estimate of the increase in the money supply or central bank assets that would normally be needed to reduce the interest rate by one percentage point, and thereby calculated the needed increase in central bank assets. this is a logical approach, but we should note that it extrapolates economic behavior far beyond the range of the experience on which the estimated taylor rule is based. 4 second, there

rising real and nominal wages which have emboldened private consumption expenditures. of course, the data underlying this picture, does not come in smoothly, and aside from the labor market data that were consistently strong, we had plenty of fluctuations, including significant revisions of quarterly national account data and despite a robust current account surplus, we faced a clearly underperforming export sector. the lull in export was in part due to the slowdown in world trade, but we were keenly aware of the continuing strengthening of the shekel, beyond what we could estimate would be the normal adjustment reflecting the relatively good performance of the israeli economy. so unemployment was at an all - time low, wages were rising and yet inflation remained low, compelling us to dig deeper into its sources in order to disentangle its underlying “ core ” trend, from a series of exogenous shocks that pushed inflation down. these were many and varied, from importing “ deflation ” from abroad, to decreasing energy prices, to successive reduction in administered prices such as water, electricity, children daycare, a cut in vat, to welcome structural reforms that enhanced competition in industries such as communication. these came in addition to a backdrop of social protests concerned about the cost of living that increased the public ’ s price awareness and changed consumer habits enhancing competition in the retail sector, particularly with the increased use of internet buying. this phenomenon is 1 / 2 bis central bankers'speeches shared by other countries, but there is ample evidence that the level of prices in israel is higher than its other advanced countries, thus leaving more space for price reductions through enhanced competition and consumer savvy. throughout this period, of now about 3 years, all forecasts and market expectations systematically underestimated the downward forces on prices, and thus overestimated forthcoming inflation. the discussions in the mpc reflected our challenge of on the one hand allowing for a welcome reduction in the level of prices, and on the other maintaining the overall price stability environment – a hard won anchor that allows for the good functioning of the economy. we lowered the bank of israel ’ s rate as inflation was dropping, to reach 0. 1 % in march of 2015 when 12 month inflation reached what turned out to be its lowest point at – 1 %. in addition, whenever the shekel appeared to embark on what we viewed as excessive momentum not justified by fundamentals, we intervened in the fx market, and still do so, not only because of its impact on prices