, which seemed to have appeared shortly after the turn of the century, quickly gained popularity, capturing the optimistic mood of the times, and central banks were praised for their substantial role in bringing about prosperity. in a sense, the 1990s and 2000s, up until the crisis, were, in fact, the heyday of central banking. one exception, however, was japan, which experienced a prolonged period of sub - par growth and modest but persistent deflation. actually, japan was experiencing profound changes in the economy ahead of other developed economies. while japan had suffered severe stagflation at the time of the first oil crisis of the 1970s, its subsequent economic performance was superior compared with other developed economies, reflecting the restraint in wage increases and appropriate monetary policy. the bubble years of the second half of 1980s were, in this vein, the culmination of all that was good about the japanese economy. the bubble burst in the 1990s, and japan has since been suffering from its lingering effects. it is quite remarkable that economies in north america and europe are now experiencing the same changes that japan has experienced from the 1990s onwards. since 2006, the united states has experienced a drawn - out period of declining house prices. this was only the beginning. financial strains quickly spread around the world engulfing many venerable names both in the united states and europe, and leading to, but not ending with the demise of lehman brothers. as governments and central banks intervened aggressively, the global financial system and the economy subsequently gained a respite, but it was short - lived. beginning from the spring of 2010, cascading problems within the euro area weighed on global economic activity and heightened uncertainties. consequently, output in the developed economies is only 4 percent above the pre - crisis peak, and average growth since 2007 is a paltry 0. 8 percent. what went wrong? what can central banks do to prevent the development of another disruptive bubble? policy makers are certainly in the midst of soul - searching, regarding the conduct of monetary policy and the regulation and supervision of financial institutions in the years leading to and during the crisis. today, i will just stress one point, considering that i have already explained my thinking on another occasion. 3 the key issue is that price stability and financial stability are intricately intertwined. in an environment of price stability, economic agents may come to expect ever more strongly that a prolonged period of low interest rates would be sustained. this could exacerbate financial imbalances

, if the central bank is not credible, it may even end up not being able to implement measures that it deems necessary. furthermore, the effectiveness of the measures heavily depends on expectations formed against the background of credibility. the time - honored reluctance of central banks to enter into quasi - fiscal measures is based on the deference of neutrality, i. e., the need to be seen as not meddling with the allocation of scarce resources, which is crucial for maintaining independence. in this context, the unconventional policies currently implemented by central banks of the major developed economies will truly be tested when central banks deem that the policies are no longer necessary. the appropriateness of the policies will inevitably be judged by how quickly and smoothly such policies could be unwound. the tricky issue is that expectations and credibility are not necessarily malleable or may not behave predictably. while central banks must be bold in times of crisis, they need to be most vigilant at the same time. the third condition is upholding the public support for the market economy. while this goes beyond central bank policies, it is most relevant because all the policies adopted by the central bank presuppose the existence of a competitive market economy. such support can easily be eroded when the public at large comes to believe that the decks are stacked against them. the increase in unemployment following the recent financial crisis, the widening of the wage gap between skilled and unskilled workers due to deepening globalization, and the antipathy against banks and bankers rescued by taxpayer money, could all result in the weakening of support for a competitive market economy. in the long run, this could pave the way for the adoption of policies that are detrimental to the efficient functioning of the economy. one of the lessons learned from the interwar years in the first half of the twentieth century was that crisis response begets the next crisis, then epitomized by the spread of protectionism and beggar - thy - neighbor competitive devaluation. policy makers, including central bankers must not forget such lessons of history. see masaaki shirakawa, “ sustainability of government debt : preconditions for stability in the financial system and prices, ” banque de france, financial stability review, no. 16, april 2012, forthcoming. bis central bankers ’ speeches v. concluding remarks in his recent book, the influential author robert shiller notes that “ central banks are an invention that served its purpose at a certain time in history,