is that such an approach is vulnerable to policy makers giving excessive weight to low probability, but high - cost scenarios. therefore, as was pointed out by chris sims in his 2001 paper, this approach should only be seen as one method for generating reference priors. its results should be compared to more direct approaches to assessing prior beliefs. at the end of the day, and here i am happy to quote mervin king, “ there is no escaping the need to make judgements about which models are more plausible than others ”. 4 another important lesson we can learn from recent research is that the problem of model uncertainty is compounded by measurement problems regarding key variables like real output and its components. moreover, a number of studies have shown that the problem of measurement error is likely to be particularly severe for variables that cannot be observed directly. take the output gap and the “ neutral ” level of real interest rates as two variables which figure very prominently in much of the recent literature on optimal monetary policy. as a consequence, every attempt to fine - tune the economy bears the risk of policy errors with the corresponding negative effects on price stability. in my view, this line of research has very much strengthened the case against output stabilisation as a target of monetary policy – a case which was already made by milton friedman as early as 1961. let me give you another example of a measurement problem which also shows how closely linked data and model uncertainty are. in a current research project at the bundesbank we try to shed some light on the factors that drive the recent strong money growth in the euro area. our study shows that economic agents tend to increase their money holdings when the financial environment is characterised by low yields, high volatility and a change in risk perception. such an environment may be referred to as one of heightened macroeconomic uncertainty. trying to integrate this uncertainty into a model for money demand poses a severe measurement problem. a variable has to be revealed which cannot be observed directly. we at the bundesbank try to uncover such uncertainties from a variety of observable variables which describe the financial market situation and economic sentiment. the estimated proxy for macroeconomic uncertainty - or risk sentiment - helps us to explain recent monetary developments in the euro area. against this background, we believe that difficulties with standard specifications of money demand should not be taken as an argument for abandoning monetary indicators and monetary analysis all together. rather, in our view, we need to deepen our understanding of the link between money and prices

. relationship with japan's financial crisis looking back, if japan's financial crisis in the late 1990s had been settled more promptly with ample liquidity provision and capital injection, the large - scale credit crunch could have been avoided, and thus the subsequent path of japan's economy might have been different. this widely shared lesson was put to good use at the time of the global financial crisis afterwards. i note that it is important to address the private sector's solvency problem through provision of a massive scale of liquidity and through credit enhancement by means of swift capital injection. in japan, the bailout of financial institutions with taxpayers'money experienced a strong backlash from the public. it took a considerable amount of time before public funds were actually injected into financial institutions. in the aftermath of the financial crisis, the injection of public funds was carried out several times. however, it actually took several years before concern about the stability of the financial system subsided ( chart 10 ). it also can be said that the resumption of base pay increases under the abe administration might prove that long - term inflation expectations have started to rise from 0 percent. it was only after the introduction of the zero interest rate policy in 1999 and the introduction of quantitative monetary easing in 2001 that the market's liquidity concern was alleviated through the bank's provision of ample funds ( charts 11 - 1 and 11 - 2 ). 9 quantitative monetary easing was a pioneering attempt in increasing the predictability of monetary policy. it was conducted both by lowering market interest rates to virtually 0 percent through the provision of ample funds surpassing the required reserves and by introducing forward guidance. nevertheless, i have a feeling that the bank could have addressed liquidity concern in the late 1990s at a much earlier stage. in that regard, i somewhat have understanding toward the criticism that the bank's monetary easing was insufficient at that time, and as a result the financial crisis was prolonged and the economy fell into a deflationary trap. 10 i also note that the bank paid particular attention to the negative feedback loop between asset price deflation and the real economy. it did not pay due attention to mild deflation for a long period. in fact, the bank repeatedly explained that the deflation was mild and the economy was not falling into a deflationary spiral, unlike at the time of the great depression in the 1930s. 11 it is true that the bank's provision of ample funds and the government's capital injection helped avoid a def