by behavioural cognitive impairments. the approach of angeletos and lian ( 2016 ) is also promising. 3 their work is related to earlier contributions by morris and shin ( 1998, 2002 ) and woodford ( 2003 ) and is similar in spirit to adam and marcet ’ s work ( 2011 ) on “ internal ” vs “ external ” rationality. it relaxes the assumption of ‘ common knowledge, ’ which typically goes hand in hand with the assumption of rational expectations. the paper points out that the puzzlingly strong effects of forward guidance arise through general equilibrium mechanisms, such as the feedback loop between aggregate spending and inflation. assuming a lack of common knowledge attenuates the general equilibrium effects. sufficiently strong information frictions qualitatively solve the forward guidance puzzle through anchoring the response of expectations to changes in policy. this is clearly another intuitive and welcome development in the theory of monetary macroeconomics. what do these findings imply for the practice of forward guidance? as policy makers, we know that many of the conditions that the standard models presuppose are often not met in practice. we are also acutely aware of the challenges that arise when attempting to effectively communicate the conditionality of promises on the future path of interest rates. we understand the advantages of a consistent and clear communication strategy – indeed, inconsistent or vague promises about the future course of monetary policy often introduce additional noise and 3 / 9 bis central bankers'speeches raise rather than reduce economic uncertainty. my answer therefore is that we will continue using forward guidance to some extent, but knowing that it is an imperfect tool and therefore only as one of the various non - standard measures that we can activate when deemed necessary. large scale asset purchases large - scale asset purchases, especially purchases of sovereign bonds since early 2015, have been one of our most salient non - standard measures in the euro area. the eurosystem has already purchased more than 2 trillion euros of public and private assets and we intend to purchase assets at a monthly pace of 60 billion euros until december 2017, or beyond, if necessary, and in any case until the governing council sees a sustained adjustment in the path of inflation consistent with our inflation aim. the programme was instrumental in eliminating deflation risks, contributes to the ongoing recovery and helps us bring inflation closer towards our objective. the app in the euro area has drawn attention to particular transmission channels of large - scale asset purchases over and above the standard portfolio rebalancing and signalling channels. another

purchases by stating that “ we expect the key ecb interest rates to remain at their present levels [ … ] well past the horizon of our net asset purchases. ” the effectiveness of forward guidance is however, a hotly debated topic, both in academia and in policy circles. in standard dynamic stochastic general equilibrium ( dsge ) models, forward guidance is extremely effective, under the usual assumptions of forward - looking rational expectations, coupled with the central bank ’ s ability to commit to future actions. so much so that the lower bound on nominal interest rates in these models becomes a trivial constraint : the central bank can maintain the full effectiveness of monetary policy by setting an appropriate future lift - off date. this is a consequence of the models assuming that consumer behaviour is determined by standard euler equations that impose a strong present impact on consumption resulting from the future behaviour of interest rates. however, economists and policy makers around the world including myself, are much more sceptical about the power of forward guidance alone to deliver stable macroeconomic outcomes in relation to the predictions of the standard models. this became known in the literature as the “ forward guidance puzzle ” ( a term coined by del negro, giannoni, and patterson, 2015 ). naturally, forward guidance helps but it certainly does not possess the powerful grip on the economy that it shows in the standard theory. furthermore, its marginal effectiveness is certainly not increasing as the central bank extends the lift - off date further in the future. therefore, an effort to amend the standard theory is needed, and i am very glad that some of the papers presented at this conference address this very issue. at this point in time, there is a wealth of approaches to solve the problem created in dsge models. 2 see del negro, giannoni, and patterson, 2015, gabaix ( 2016 ), garcia - schmidt and woodford ( 2015 ), mckay, nakamura and steinsson ( 2016 ), werning ( 2015 ), for example. among these, i find the solutions of mckay and co - authors ( 2016 ) and gabaix ( 2015 and 2016 ) particularly useful. heterogeneous agents, credit constraints and precautionary savings limit the reaction of consumers to future interest rate movements. gabaix introduces behavioural agents with myopic capacity to perfectly anticipate the future, a hypothesis reflected in a discounted euler equation that avoids the “ forward guidance puzzle ” and illustrates the advantages of considering shorter horizons implied