banks soon followed. to put things very simply, the bank influences inflation by lowering or raising interest rates to heat up or cool down the economy. the idea is to adjust rates to balance total demand and supply, thereby stabilizing inflation. low interest rates stimulate demand by encouraging people and businesses to borrow, spend and invest. high interest rates do the opposite. in practice, inflation targeting is much more complex and difficult than this. many forces that affect demand and supply in the economy lie beyond our control. what is more, our policy actions take time to have their full impact — up to two years. this means that we are always working with forecasts of where the economy and inflation will be in two years, and attempting to influence those things in the future. 1 / 6 bis central bankers'speeches a crucial feature of this framework is that we have just one policy instrument : our influence over interest rates. this represents the first major limitation on the power of monetary policy. with only one instrument, we can aim at only one objective. if inflation is our objective, we cannot use interest rates to target other things, such as the exchange rate or the unemployment rate, at the same time. of course, that is not the same as saying that interest rates do not temporarily affect other things, such as economic growth and employment, as we go about targeting inflation. but ultimately, inflation is the sole target of the policy. in the late 1980s, when inflation targeting first came under active consideration, many were skeptical that it could work at all. as it turns out, it has worked very well. inflation expectations have become firmly anchored on our 2 per cent target. a symptom of our success is the fact that many people do not appreciate how problematic high and variable inflation and interest rates can be. this is a gift to the next generation, if you will. my children will never pay anything like the kind of interest rates i have paid in my lifetime. it is not just that inflation and interest rates have been lower and more stable. with inflation expectations well anchored, monetary policy is more effective. the economy adjusts more quickly to shocks than in the past. firms and households can make longer - range plans. wage negotiations are much simpler. economic cycles are less severe. unemployment is lower on average and less variable. these observations are based on global experience from the early 1990s to the mid - 2000s, a 15 - year tranquil period called the great moderation. all that success has led

therefore to inflation as well — would be rising throughout the scenario. fortunately, we did not follow this scenario. both macroprudential and fiscal policies were also put in place, and this produced better outcomes. it is important to understand the role that expansionary fiscal policy played. our models show that if fiscal policy had remained unchanged following the collapse in oil prices in late 2014, the bank would have had to set interest rates as much as 50 basis points lower during the 2015 – 18 period to get the economy back home. instead of approaching full capacity in mid - 2017, it would have taken until the end of 2018 for the economy to get home with inflation on target. this demonstrates that, at low interest rates and high debt levels, monetary policy has less power than fiscal policy in stimulating the economy. meanwhile, that lower track for interest rates would have led to even higher household debt and house prices. our growth - at - risk framework shows that this would have meant an even greater risk that a new economic shock would cause the economy to fall into a low - growth scenario with inflation below target. the bottom line is that the mix of monetary, fiscal and macroprudential policies matters. in certain circumstances, relying less on low interest rates to bring the economy home can mean a more resilient economy. knowledge limitations even though it can be hard to imagine counterfactual scenarios, these model simulations demonstrate some of the trade - offs that policy - makers face. they also highlight the third major limitation of monetary policy — how uncertainty limits the ability of the policy - maker. complex economic models are indispensable tools for economists, particularly those who work at central banks. however, these tools are all based on historical averages and embrace several simplifying assumptions that may not hold in reality. every relationship in the bank ’ s models is meant only to approximate how part of the economy will behave, on average, over time. the importance of this uncertainty is magnified by the fact that our policy operates in the future. actions we take today will have their ultimate effects only in the next couple of years. in hockey, we must pass the puck not at the feet of our teammate, but to where he or she will be when the puck arrives. the sense of motion in the economy adds to the uncertainties we face as modellers and forecasters. the reality is that conducting monetary policy requires a lot of judgment. rather than the finely tuned mechanical process many people imagine, policy is