c. williams, federal reserve bank of san francisco working paper no. 2013 - 15, july 2013. bis central bankers ’ speeches multiyear contracts is a multiyear nominal stability. a policy that “ lets bygones be bygones ” from year to year may not achieve this kind of stability, especially when policy options can become constrained, in the short term, by the zero bound. a policy that takes a longer - term perspective and is properly communicated and executed – so as to instill confidence that monetary policy will hew to a 2 percent inflation target rather than fixate on the run - rate of the past four quarters or the outlook for the next four – may better supply the longer - term comfort that households and businesses need to plan and budget. such a policy would reduce the uncertainty that monetary policy as it is currently conducted spawns and would be more effective in doing its part to assist in economic expansion. 8 a dime between two nickels i hope this is enough to get a conversation started. i will now turn the microphone over to john taylor. in doing so, i am reminded of ross perot ’ s quip when he was placed between bill clinton and george h. w. bush for a predebate photograph in the 1992 presidential election. noting that mr. perot was substantially shorter than the other two men, a reporter asked him how he felt. his reply : “ i feel like a dime between two nickels. ” in contrast, compared to john taylor, i feel like an intellectual dwarf – a mere penny sitting on the dais next to john ’ s $ 100 bill brain. and i ’ m talking about the new, difficult to replicate $ 100 bill that will be released next tuesday. please join me in welcoming john taylor to the podium. for more information about tightening control of inflation expectations by putting a five - year inflation rate, in place of the usual four - quarter inflation rate, in the taylor rule, see “ all in the family : the close connection between nominal - gdp targeting and the taylor rule, ” by evan koenig, federal reserve bank of dallas staff papers, no. 17, march 2012. bis central bankers ’ speeches

the san francisco fed, john williams, produced a formal study that posited that the aggressive use of unfamiliar policy tools like quantitative easing and operation twist add to aggregate economic uncertainty and, if applied at all, should be deployed more cautiously than our more familiar tools. 7 large margins of error in general, the objective of monetary policy is to provide households and firms with an economic environment that makes it attractive to use money as medium of exchange and store of value. since many private contracts, including labor and debt contracts as well as capital expenditure commitments, extend out several years, a multiyear policy perspective is needed. a multiyear perspective is especially important when the economy may encounter the zero bound. the explanation is that by interfering with the normal conduct of monetary policy, the zero bound increases the likelihood that policy will miss its objectives year after year in the same direction, so that the errors accumulate over time. over the past five years, for example, pce inflation has averaged 1. 2 percent per year. the fomc ’ s announced long - term inflation objective is 2. 0 percent. over a single year, the difference between 1. 2 percent and 2. 0 percent inflation is inconsequential. over five years, though, that small difference cumulates to a 4. 26 percentage point difference in the price level, which is not insignificant, perhaps, if back in 2008 you took out a mortgage with a fiveyear balloon. alternatively, nominal gdp growth over the past five years has averaged 2. 4 percent per year, when ordinarily one might have expected 4. 5 percent average annual growth ( 2. 5 percent real growth plus 2. 0 percent inflation ). again, the difference is inconsequential in any given year. accumulated over five years, though, the level of nominal income today is fully 12 percent below what might reasonably have been expected when mortgage and auto loan agreements were made back in 2008. kindly note that i am not advocating any change to the fomc ’ s 2 percent inflation target. my point is simply to highlight the longer - term consequences of what might appear to be smallish, shorter - term deviations from the norm. business operators plan capital expenditure and payrolls not in one - or two - or even three - year increments ; they plan and budget over longer - term horizons. the nominal stability that people need if they are going to negotiate see “ a defense of moderation in monetary policy, ” by john