legislative, action, the section 113 designation tool will inevitably bear more of the weight in policies crafted to contain systemic risk. the second issue to which i would draw your attention is the absence of a deep body of analytic work on which to form judgments about the social utility of very large, complex for a survey of the entire shadow banking system, see zoltan pozsar, tobias adrian, adam ashcraft, and hayley boesky ( july 2010 ) : “ shadow banking ( 878 kb pdf ), ” federal reserve bank of new york staff reports, no. 458. see daniel k. tarullo ( 2010 ), “ comments on ‘ regulating the shadow banking system, ’ ” remarks delivered at the brookings panel on economic activity, washington, september. bis central bankers ’ speeches financial institutions. this issue surfaced during the debates over financial reform in 2009 and early 2010, when some argued that the only way to counteract tbtf and its attendant risks for society was to break up these institutions. & advocates of this approach asserted that there was little or no academic support for the proposition that the largest firms needed to be their current size in order to provide whatever efficiencies were achievable. while this is true enough, it is obviously the case that the failure to find such efficiencies does not mean they do not exist. given the surprisingly small number of studies on this issue, one might reasonably be reluctant to draw conclusions in either direction. while proposals to break up large, complicated financial firms did not win the day, the issue of what economies and, possibly, diseconomies of scope and scale attach to these institutions remains very relevant today. consider, for example, that measures designed to contain systemic risk associated with these firms will create incentives and disincentives for them. agencies will be much better positioned to make cost - benefit assessments of different regulatory approaches if they have a solid foundation of analytic work that helps them understand when and why firms do or do not need a certain size or scope to serve useful capital allocation roles. there is also need for more study of the dynamics by which stress at large, interconnected institutions can have negative effects on national and global financial systems. in fact, what may be needed is a new subdiscipline that combines the perspectives of industrial organization economics with finance. without work of this sort, it may be difficult to fashion the optimally strong, sensible, post - crisis regulatory regime.

s in our dna to have these concerns ; and they remind us of the need to continually do our best to calibrate important markers such as the natural rate of unemployment, keep close tabs on inflation expectations and have our eyes open for early warning signs of financial instability. but i believe a greater risk today is that we buy too quickly into thinking that the equilibrium rate of unemployment has jumped 2 or 3 percentage points or that long - run inflation expectations have become so fragile that they are on the verge of spiking well above 2 percent. i just don ’ t see the evidence out there supporting this view. but if we do buy into it, then we ’ ll end up following overly restrictive policies that could unnecessarily risk condemning the u. s. economy to a lost decade – or even more. and the costs of taking this route would be unacceptable. references bernanke, ben s., vincent r. reinhart and brian p. sack, 2004, “ monetary policy alternatives at the zero bound : an empirical assessment ( external ), ” brookings papers on economic activity, vol. 35, no. 2, pp. 1 – 78, available by subscription. eggertsson, gauti b., and michael woodford, 2003, “ the zero bound on interest rates and optimal monetary policy ( external - pdf ), ” brookings papers on economic activity, vol. 34, no. s1, pp. 139 – 211. federal open market committee, 2005, meeting transcript ( external - pdf ), february 1 – 2. krugman, paul r., 1998, “ it ’ s baaack : japan ’ s slump and the return of the liquidity trap, ” brookings papers on economic activity, vol. 29, no. 2, pp. 137 – 206. svensson, lars e. o., 1997, “ optimal inflation targets, ‘ conservative ’ central banks and linear inflation targets, ” american economic review, vol. 87, no. 1, march, pp. 98 – 114. taylor, john b., 1979, “ estimation and control of a macroeconomic model with rational expectations, ” econometrica, vol. 47, no. 5, september, pp. 1267 – 1286. woodford, michael, 2003, interest and prices : foundations of monetary policy, princeton, nj : princeton university press. werning, ivan, 2011, “ managing a liquidity trap :