policy. by this we usually meant a more general state of affairs where inflation is low and stable, the banking sector is healthy and not a source of excessive money supply growth, the currency is reasonably strong and external imbalances are not building up. however, the world's macroeconomists longed for a simpler notion of a target that could be expressed in an exact, numerical, way, preferably with a single number. out of this was born price stability defined as low single - digit inflation, usually derived from the consumer price index ( cpi inflation ). 1 / 5 bis - central bankers'speeches in an inspirational group of economists here at the faculty, we paid limited attention to the fresh trends in american academia and central banks at the time, and mainly discussed various historical views of money and monetary policy. after all, we weren't experiencing any great moderation around us at that time. in particular, the second half of the 1990s was quite wild in the macroeconomic and financial sense in the czech republic and many other small open economies. the great moderation phenomenon manifested itself here later as a " temporary calm before the storm " between 2003 and 2007. then the global financial crisis ( gfc ) came and put a definitive end to the idea of a great moderation. the global financial crisis was no great surprise to me and my colleagues at the cnb. this is evidenced by the fact that in 2004 we were one of the first central banks in the western world to set up a team for analysing risks to financial stability. the pitfalls of mainstream macroeconomics just after the gfc, a heated debate erupted about the merits of mainstream macroeconomics. by that we mean the nkm presented in dsge models. i will thus refer to it as nk - dsge throughout my lecture, although today this term covers a wider range of approaches than it did 10 or 15 years ago. state - of - the - art nk - dsge approaches introduced rigour and strong microeconomic foundations into macroeconomic thinking. they became an important tool for simulating the effects of monetary policy and other macroeconomic shocks. but nothing is for free. the positive features of this framework came at the cost of what is described as a high degree of model stylisation. put simply, these models, especially at their beginnings, were very narrow in terms of the specification of the economy and its behaviour, and omitted a number of important linkages and processes. despite much

tend to forget them and start to regard highly stylised models as a correct and complete presentation of the economy. what is not included in the model ceases to matter to them. i am thinking here in particular of the banking sector, capital markets and real estate, which in most countries is a key investment asset. fiscal policy has also been marginalised. neglecting important factors increases the likelihood of systematic economic policy mistakes. how can this be avoided? seemingly simply – it is important to recognise that putting all your eggs in one basket is not appropriate when considering macroeconomic dynamics and the effects of monetary policy. we should not forget that there are many different stories playing out in the economy at any given time. some are fast - moving and some slow ; some are strong at a given moment but later fizzle out ; some prevail over time, even if no one would have put a brass farthing on them at first. i would liken it to a symphonic orchestra in which different instruments play very different music at different times in terms of number of notes and volume. but in an economy, no sheet music is handed out – it's a socio - political system that creates its own endogenous dynamics, that is, it rewrites the score itself, and in quite different ways each time. for a while, modern macroeconomics tried to get around this more or less intractable situation by picking just one out of a wide set of stories, often treating it as if it were immutable in time and space. and when reality deviated from that story for an extended period, it opportunistically explained it away as bad luck in the form of a series of unpredictable adverse shocks. a persistent challenge for inflation - targeting central banks is the phenomenon of inflation itself. we recognise that the cpi or some similar inflation measure, which lies at the heart of this monetary policy framework, may not be an ideal representation of what is meant by inflation in traditional monetary theory. personally, i still adhere to the monetarist definition that inflation means a steady and continuous rise in the price level, that is, a situation where different price categories and nominal variables generally show a similar trend. cpi inflation does not quite fit this definition, and it is not always desirable to regard its short - term fluctuations as genuine inflation or deflation. this is partly because cpi inflation tends to change quite frequently as a result of shocks of a non - macroeconomic and non - monetary nature.