, such as restrictions on foreign purchases of domestic assets and limitations on the ability of domestic residents to invest abroad, have promoted home bias, although, as i will discuss shortly, many such direct obstacles in recent decades have been mitigated. indirect barriers, such as high costs of foreign transactions, inadequate information on foreign investments and cultural and linguistic differences between foreign and domestic investors, are also seen as sustaining home bias. and finally, there are exchange rate and country risks. wild swings in exchange rates can entirely erase earnings on foreign assets, even as those same assets yield a healthy return in local currencies. concern over who will bear the exchange - rate risk or, alternatively, who will bear the costs of hedging that risk are an additional factor retarding international investment. along with foreign exchange risk, political risk helps to drive a wedge between foreign and domestic perceptions of the expected risk - adjusted return to an asset. the consequence of such dual expectations is a lower market clearing price for those assets and a lower level of foreign investment than would exist in the absence of such distortions. aside from any direct or indirect barriers, people seem to prefer to invest in familiar local businesses even though currency and country risks do not exist. the united states has no barriers to interstate investment, and the states share a common currency, culture, language, and legal system, yet studies have shown that individual investors and even professional money managers have a slight preference for investments in their own communities and states. trust, so crucial an aspect of investing, is most likely to be fostered by the familiarity of local communities. researchers have consistently found that, in general, investors direct too much of their savings domestically. owing to risk aversion, they tend, to their own detriment, to over - discount foreign returns. such suboptimal allocation of capital lowers living standards everywhere. in their seminal paper twenty years ago, feldstein and horioka pointed out that, on net, nations ’ savings are generally invested domestically. their research implies that global savings are inefficiently distributed to investment, meaning that savers are bearing too much risk for the returns they achieve and that countries with high - potential investment projects are getting less financing than risk - neutral investors, if they exist, will price an asset solely on the basis of its expected return. but at best, very few humans are risk neutral. in general, investors require an asset ’ s price to be discounted below the risk

policy space in a negative spiral. as we have seen in other countries, if inflation consistently falls short of the central bank ’ s objective, consumers, workers, and businesses start to expect lower inflation to continue. expectations of low inflation can create a self - fulfilling dynamic with actual inflation, making it even more difficult for the central bank to boost inflation. and because inflation is reflected in nominal interest rates, that, in turn, can reduce the amount of policy space the central bank has available to prevent the economy from slipping into recession. in fact, in recent years, central banks around the world have had to use a larger variety of policy tools than they have traditionally used to support the recovery. some issues to explore given the new normal of low equilibrium interest rates and low sensitivity of inflation to slack, it is prudent to assess how well various approaches worked both here and around the world, with a view to identifying the best ways to promote the goals the congress assigned to us. earlier this month, we held a conference in chicago where we heard from experts as well as community organizations, small businesses, labor organizations, and retirees. we are looking at our tools and strategies, assessing not just the various approaches that were undertaken, but also approaches that have been proposed but not tried. one of the ideas discussed in chicago is that the federal reserve should explicitly promise to “ make up ” for misses on inflation during a downturn. the federal reserve could hold interest rates lower after a recession is over, perhaps by promising not to raise interest rates until inflation or the unemployment rate have reached particular levels. 5 a related idea discussed in chicago is average inflation targeting, meaning the federal reserve would aim to achieve its inflation objective, on average, over a longer period of time — perhaps over the business cycle. 6 this approach could also have aspects of a makeup policy, depending on how it is designed. while such approaches sound quite appealing on their face, they have not yet been implemented in practice. there is some skepticism that a central bank would in fact prove able to support above - target inflation over a sustained period without becoming concerned that inflation might accelerate, and inflation expectations might rise too high. 2 / 4 bis central bankers'speeches at the chicago conference, we also heard how difficult it can be to estimate with any precision the “ maximum employment ” leg of our dual mandate. 7 there is no fixed destination point for maximum employment — no single number where we can be sure we are “ there. ” maximum employment