will also be particularly important. moreover, the low current levels of inflation and resource utilization imply, from my perspective, that the welfare costs of the economy running stronger than expected for a while are considerably lower than the costs of its running weaker. in these circumstances, i think policy action can await convincing evidence that labor market slack is on a declining trend and that inflation is no longer decreasing. i would note that patience in policy action can take several forms. one form would be to wait before taking any action ; another would be a damped trajectory for the funds rate once tightening begins. a more gradual increase that begins sooner might enable the federal reserve to better gauge the financial and economic response to its actions and reduce the odds that a sharp tightening tack would be required at some point to prevent the economy ’ s overshooting. however, this approach might also run a larger risk of prematurely truncating the expansion - especially if markets interpret the first tightening move as presaging a rapid return to a so - called neutral policy. undoubtedly, the fomc will choose a strategy that does not fit neatly into any box, but these considerations will likely play a role in our deliberations. some observers argue that the federal reserve has already been too patient. they are concerned that continued policy accommodation is distorting interest rates and asset prices and encouraging a build - up of debt, and thereby laying the groundwork for financial and economic instability. clearly, the low funds rate has held down long - term interest rates and boosted asset prices. these movements are, in fact, some of the key channels through which monetary policy has stimulated demand. whether prices in some markets have gone beyond what one might have expected from easier monetary policy is unclear. when interest rates increase, prices will undoubtedly adjust to some extent - in some cases simply by rising less rapidly than they would otherwise - and debt - service obligations will move up. households, businesses, and financial institutions need to be prepared for this adjustment. but i think the hurdle is high - and appropriately so - for a central bank to tighten policy, and in the process damp an expansion of economic activity in the short run, on the suspicion that movements in asset prices and increases in debt threaten economic stability over the longer run. conclusion in sum, monetary policy will be facing some interesting challenges over the next several years, even if the economy proceeds along the favorable path i have outlined today. and, as all forecasters know, the odds are always high that events will

##economic policy recommendations of the so - called washington consensus, which emphasised the laissez - faire side of liberalism – decentralization, deregulation and privatization – while downplaying the legal and institutional underpinnings of a wellfunctioning market economy. the “ poster boy ” for this approach was chile in the 1980s under the influence augusto pinochet and german immigrants connected to his regime, together with the so - called “ chicago boys. ” 3 while quite striking results were achieved initially, leading milton friedman to refer to “ the miracle of chile ”, financial speculation and foreign debt quickly built up behind the scenes. moreover, privatisation allowed formerly public monopolies to become private monopolies – precisely what market - oriented reforms were supposed to avoid. the speculation bubble then burst in 1982, after which economic policy changed track. a similar pattern was observable in other transition economies. russia, for example, privatised and liberalised extensively following the collapse of the u. s. s. r. without a solid legal and institutional framework to organise market interactions, however, the country experienced a series of crises, while resources ended up being concentrated in the hands of a few powerful individuals. these experiences led the assumptions of the washington consensus to be progressively revised. even the imf acknowledged the flaws in the original list of suggestions, in particular regarding the importance of institutions. 4 reviewing the available evidence, the economist dani rodrik wrote that the strength of institutions is the most important element of development economics. the mantra of the so - called “ revised ” washington consensus, he wrote, should be to “ get the institutions right. ” 5 vanberg, viktor j. “ the freiburg school : walter eucken and ordoliberalism. ” walter eucken institut, april 2004. the chicago boys were a group of young, liberal economists from chile educated at the university of chicago. “ report on the evaluation of the role of the imf in argentina, 1991 – 2001. ” independent evaluation office of the imf, july 2004. rodrik, dani, et al. “ institutions rule : the primacy of institutions over integration and geography in economic development. ” imf working paper series, november 2002. bis central bankers ’ speeches 2. the principles of effective economic policy the aim of this brief review is to underscore that all well - functioning market economies are based on a consistent accord of rules, instruments and institutions. and what i would