to the lagged interest rate dependent variable, which in these rules moderates the pace of reaction of the policy rate to its fundamental determinants. in any case, in the naive theory of this world, plain comparison of the frequencies of policy moves and the size of interest rate adjustments would suffice to tell the strategies of these two central banks apart. a smoother policy path would signal a “ more passive ” strategy. but of course the world is not that simple, and in fact there are serious pitfalls lurking behind strategic inferences drawn on the basis of comparisons of variances in policy rates. it is not too difficult to portray situations in which such inferences could be highly misleading. i will give three examples, all relaxing one important qualification upon which my earlier example was predicated : the assumption that our two central banks are confronted with the same economic environment. first, imagine two central banks which are equally responsive to economic conditions : in the reactionrule jargon that i am using here, these are two central banks that share exactly the same reaction parameters. but one central bank now faces a less dynamic economy than its counterpart. by “ less dynamic ” i mean an economy that – as a matter of regularity – is hit by shocks of smaller magnitude which tend to fade away more gradually. here, reaction parameters are the same – by hypothesis – but the reaction variables fluctuate at different speeds. all other things being equal, the patterns of adjustment of the policy rate that the same rule would induce in the two economies would be likely to look very different. the central bank operating in the less dynamic economy would in all likelihood be observed to adjust interest rates along a more moderate path. the other central bank would appear more reactive. but any strategic implications drawn from the variance in the two policy paths would be purely illusionary. the smoother course of policy would not reveal any deep - seated strategic inertia : it would only reflect the same response to shocks with quite different dynamic properties. monetary policy would appear “ passive ” because the economy itself was evolving slowly. a second example again considers two identical central banks, now facing shocks of a different nature. one central bank predominantly faces demand shocks, which result in persistent departures from trend growth. this statistical pattern has symmetric and durable effects on output and inflation and thus presents a relatively straightforward monetary policy problem under the rule that i am postulating here for simplicity. as both reaction variables – forecasted inflation and output – would frequently move

tightened. i choose this way of framing the issue primarily because it is widely used by our observers, and because it is sufficiently concise to be easily understood. but, before launching into the analysis, i should add that, precisely because it is simple and pedagogical, this framework is also a very incomplete description of our policy behaviour. overall, because it does not capture the very essence of the two - pillar strategy, based on an economic assessment of medium - term risks to price stability, on the one hand, and a cross - checking based on medium to longer - term risks assessed though our monetary analysis, on the other. also, because such representations of our policy are not sufficiently state - contingent, whereas my colleagues and i are far from being exclusively guided by mechanical configurations of indicators, but are very interested in the contingencies, and finally take our decisions on the basis of synthetic judgement enlightened by multiple experiences. as i often say, collegial wisdom is of the essence in central banking. this underscores the tension between describing policy simply and implementing policy simply : simple descriptions of policy need not – and indeed never do – mean simple policy behaviour. assuming that the parameters attached to the various indicator variables in the reaction function indeed capture the deep strategic preferences of the central bank, empirical estimates of these coefficients are often used to quantify the strength with which the central bank intends to respond to the state of the economy. in other words, these estimated parameters are sometimes viewed as objective measures of strategic “ activism ” in monetary policy. a central bank would qualify as strategically more passive – or less active – than another central bank if the estimated coefficient attached to inflation expectations in deviation from the central bank ’ s objective, and the estimated coefficient penalising the indicator of macroeconomic slack, turned out to be smaller. why would this central bank qualify as more “ passive ”? because, for given variances of inflation and real activity, this central bank would indeed be inclined to take more moderate action in response to changes in the outlook. it would move its policy rate by narrower margins – and perhaps more infrequently – than its more “ activist ” counterpart. moreover, as analysts typically append a partial adjustment mechanism to the representation of how the central bank interest rate responds to the economic state, there is an additional source of “ activism ” – or “ passivity ” – that would emerge from these simple empirics. this is the inertia coefficient attached