available technology for achieving both sets of policy objectives. misconception # 3 : inflation targeting is inconsistent with the central bank's obligation to maintain financial stability. let me address this point in the context of the united states. the most important single reason for the founding of the federal reserve was the desire of the congress to increase the stability of american financial markets, and the fed continues to regard ensuring financial stability as a critical responsibility. ( by the way, this is a reason to be nervous about the recent trend of separating central banking and financial supervision ; i hope we have the sense not to do that here. ) i have always taken it to be a bedrock principle that when the stability or very functioning of financial markets is threatened, as during the october 1987 stock market crash or the september 11 terrorist attacks, that the federal reserve would take a leadership role in protecting the integrity of the system. i see no conflict between that role and inflation targeting ( indeed, inflation targeting seems to require the preservation of financial stability as part of preserving macroeconomic stability ), and i have never heard a proponent of inflation targeting argue otherwise. inflation targeting and the federal reserve as i noted earlier, the federal reserve, though rejecting any explicit affiliation with inflation targeting, has been influenced by many of the same ideas that have influenced self - described inflation targeters. increasingly greater transparency and more forward - looking, proactive policy are two examples of convergence in practice between the fed and inflation - targeting central banks, and i think most would agree that both of these developments have been positive and have led to better outcomes. most important, however, as i discussed in the earlier speech, under chairman volcker and chairman greenspan, the fed has moved gradually toward a policy framework of constrained discretion. in king ( 1997 ) appears to be the source of the phrase. svensson ( 1999 ), who i believe coined the phrase “ strict inflation targeting ”, calls this point “ uncontroversial. ” svensson ’ s paper and his related work also show in detail the consistency of inflation targeting with a dual mandate. a number of inflation - targeting central banks refer to inflation stabilization as the central bank ’ s “ primary long - run objective. ” at one level, this statement does not have much content because inflation is the only variable that central banks can control in the long run. its real import is to say that the central bank is responsible for long - run price stability, a statement that should be unobjectionable in

in the price of my house reflects a change in the housing services that the house is expected to provide, perhaps because individuals have come to think that houses will depreciate more slowly in the future than we had believed. in this situation, a higher house price would be accompanied by an increase in my real consumption of housing services over time but - - as long as i stayed in the same house - - by no change in my consumption of other goods and services. a second complicating factor is that many homeowners do not intend to live in their current houses forever. many expect to move to smaller houses, condominiums, or retirement communities as they get older. these individuals, who plan to “ downsize ” their housing over time, are truly better off when house prices increase, and any standard theory would predict that they will increase their consumption. at the same time, many individuals who do not currently own homes - - or who own small homes - - likely plan to purchase homes and increase their consumption of housing services in the future. these “ upsizers ” are worse off when house prices increase, and they will reduce their consumption of non - housing goods and services. the effect of changes in house prices on desired aggregate consumption depends on the relative number of individuals in these two groups and their marginal propensities to consume out of housing wealth. a third factor, which chairman greenspan has recently emphasized, is the effect of realizing capital gains in housing by selling one ’ s house or by borrowing through a home equity loan. accumulated home equity is not itself a liquid asset. in addition, its value is somewhat uncertain : although general trends in real estate prices can be easily observed, nobody receives a statement in the mail saying how much his or her home is worth, and nobody can look up the value of his or her home in the newspaper. selling a house, or getting one ’ s house appraised and taking out a home equity loan, converts this illiquid home equity of uncertain value into liquid funds with known value. recent experience and the response of monetary policy let me now turn to the recent u. s. experience, including the macroeconomic consequences of movements in asset prices since the mid - 1990s and the response of monetary policymakers. as you know, the second half of the 1990s saw a record - breaking run - up in equity values in the united states. in early 1995, the net worth of u. s. households was about 4