forecasts may not capture these dynamics. but over that longer horizon, on this argument, the economy will probably be better off if the boom is smaller or stops earlier, rather than later. policy which responds to the boom to an extent greater than required just by the short - term outlook may assist this. the opposing case does not deny the possibility that the boom will end painfully, but essentially says that modest action will be ineffective in restraining the boom, and aggressive action risks bringing on see remarks to the house of representatives standing committee on economics, finance and public administration, may 2002, at http : / / www. aph. gov. au / hansard / reps / commttee / r5558. pdf. it is worth noting that, in principle, the neutral rate can vary, though one would not normally expect it to be a cyclical variable. for example, it will be affected by things which affect the real expected return to capital. things like persistent changes in productivity growth, for example, might affect the neutral rate. it would, in principle, be affected by secular changes in saving behaviour. that ’ s before we have considered the question of whether changes in interest margins ( e. g. between cash and mortgage rates ) or levels of indebtedness may have a bearing on it. but while it is likely that the ‘ neutral ’ rate is subject to low - frequency fluctuations, i think it is reasonable to assume that it is sufficiently slow moving that it is still a useful concept, provided we don ’ t adopt the strong assumption that it never moves. indeed, wicksell expected that a stable equilibrium where the market and natural rates were equal would rarely, if ever, occur for any length of time. in a world in which capital flowed quickly to arbitrage away any differences in rates of return on capital across countries, there would presumably not be noticeable differences between the ‘ neutral ’ rate between countries. there would just be one global neutral rate, with country risk premia. but in the current world, while capital mobility has increased a lot in recent decades, the vast bulk of the capital of most nations ’ citizens is still invested at home, and differences in rates of return seem to persist. hence, it still makes sense to think there is a neutral rate for policy which is distinct from international rates, though the actual setting of policy cannot be completely invariant to what happens abroad. the very recession that policy meant to avoid. on this view, policy

various other concepts which could be cited - will give us an exact guide to policy decisions. that is asking too much of them. monetary policy always has needed some element of judgement - informed judgement desirably, and of course subject to appropriate accountability. policymakers have to make their decisions on the basis of incomplete information and uncertainty about the future, balancing the risks of various outcomes and the pay - offs and penalties attached to the various possibilities. policy frameworks also retain, desirably, sufficient flexibility to help them adapt to different circumstances and challenges. inflation targeting began in an era in which memories of two decades of bad performance were fresh, and understandably emphasised the importance of controlling cpi inflation. inflation in australia has been well controlled for a decade now. yet the challenges for policy seem as great as ever, as we have observed that asset market and financial instability can occur, and can be costly, under conditions of price stability. it is surely sensible that policymakers should care about these problems and should do what they can to ameliorate them - even if that is not very much. at the very least, we have to try hard to avoid exacerbating them. there is no inherent conflict between such an aspiration and the accepted long run goal of maintaining price stability - indeed, over any sensible horizon, the two go together. but we need to be prepared to think about the balance of risks over that horizon and to give those considerations due weight in policy decisions. of course that may not be easy to do, and perhaps it is not straightforward to explain, but it seems nonetheless to be a worthwhile endeavour.