bank of canada last observation : 2022q2 against this backdrop, a lot of discussion involves what monetary policy should do to minimize the risk that inflation expectations will drift persistently above our target. this is a process known as “ de - anchoring, ” and it can be associated with the self - fulfilling wage - price spirals that i warned against in my last speech. 7 to avoid this and bring inflation sustainably back to target, some have suggested that policy - makers may need to engineer a substantial slowdown — or even a recession. 7 see p. beaudry, “ economic progress report : navigating a high inflation environment ” ( speech to gatineau chamber of commerce, gatineau, quebec, june 2, 2022 ). - 9i want to address these concerns. the best strategy for responding to high inflation — and, most importantly, for avoiding de - anchoring — depends partly on how people form their inflation expectations. so let me start with two very different theories of expectation formation and what they mean for the disinflation process. the first theory assumes that inflation expectations are backward - looking — or what economists call “ adaptive. ” this means that households and businesses base their inflation expectations on past inflation, without trying to forecast how the future might differ from the past. essentially, this theory says that people don ’ t believe anything the central bank may say about inflation until they ’ ve seen it for themselves. an adaptive - expectations view implies that when inflation is high, inflation expectations will drift up, and central banks can ’ t rely on simple communication about future policy to bring them back down. instead, policy - makers must engineer a period of sufficient economic slack so that inflation falls, and these lower inflation outcomes then feed back into lower expectations over time. researchers sometimes liken this to a process of earning credibility. this is because what eventually brings realized and expected inflation sustainably back to target is policy - makers showing that they ’ re willing to tolerate a sizable downturn to get there. the second theory is the polar opposite — that expectations are what economists call “ rational. ” this theory assumes that firms and households are forwardlooking and understand the economy and how monetary policy affects it. in particular, businesses and households are assumed to be capable of the mental gymnastics needed to process incoming data and assess their likely implications for future outcomes. under this rational - expectations view, people ’ s understanding that appropriate policy choices will eventually bring inflation back to target

system could be limited to a core reporting system, for example – a standard approach in the reporting system, so to speak. in the second pillar, in other words the prudential monitoring of the institutions, there could be a reduction in the scope and depth of detail in the audits. and i can see potential in some places in the field of corporate governance. so, there is no shortage of possibilities for making things simpler. to avoid any misunderstanding : what i have outlined here is, for the moment, a collection of ideas and not a ready - made plan. it is still too early for that. nevertheless, we at the bundesbank together with bafin and the ministry of finance are already working on a concrete, detailed draft. we shall shortly be entering into a dialogue on this with the associations. but it should be clear from the outset that a small banking box has its limitations. what is especially important is that capital and liquidity requirements are not lowered or watered down. 5 conclusion ladies and gentlemen, the idea of a small banking box cannot be put into practice overnight. however, and this is important for me : the approach can indeed work. as a systematic and comprehensive solution, it could restore the requisite measure of proportionality in regulation. i am therefore advocating an open debate. it is no less important to me that this debate should not be exploited for a general critique of regulation. prudent, but also strict regulation and supervision are indispensable for both fiscal and macroeconomic stability. i am asking you all as institution representatives for nuanced contributions to the debate on more proportionality. make specific detailed proposals to the supervisors ; let us know where you perceive unnecessarily high burdens. in that way, we can work to together to achieve a balanced solution. thank you. 4 / 4 bis central bankers'speeches