acknowledging the extent of imperfect control over inflation ( bernanke and others, 1999, p. 154 ). the initial target range of 1 to 4 percent was often perceived as a range of indifference, which implied that inflation just outside the range would be viewed as qualitatively different from inflation just inside the range. as a consequence, inflation tended to stay near the upper border of the range. dissatisfaction with that outcome motivated the subsequent decision in mid - 1997 to move to a framework with an explicit point objective of 2 - 1 / 2 percent, with deviations in either direction treated symmetrically. this modification of the policy framework was well received by financial markets and the general public, and surveys of households and professional forecasters indicated that inflation expectations converged fairly quickly to the bank of england's point objective. 16 since the early 1990s, the reserve bank of australia's objective has been to keep the average inflation rate within a range of 2 percent to 3 percent ; thus, when the edges of new zealand's official inflation band were softened, the reserve bank of new zealand described the move as a transition in the direction of an australian - style " thick point " ( sherwin, 1999 ). from 1992 through 2003, the bank of england's inflation objective was defined in terms of the retail price index excluding mortgage interest ( rpix ). in october 2003, the u. k. government announced that the official inflation objective would henceforth be defined in terms of the consumer price index ( cpi ) and that the target would be set at 2 percent, a choice reflecting the fact that the recent average for cpi inflation had been about 1 / 2 percentage point lower than that of rpix inflation. the euro area and canada the importance of anchoring expectations helps explain why other central banks that initially adopted an inflation objective stated in terms of a range – even a narrow one – increasingly emphasized a single value in their communications or have replaced the range with a point objective. for example, in may 2003 the european central bank ( ecb ) clarified that in implementing its mandate of price stability, monetary policy would be aimed at maintaining inflation " below, but close to, 2 percent in the medium term " ( european central bank, 2003 ). that clarification was welcomed by market participants and likely made it easier for the ecb to anchor inflation expectations. as a final example, consider the evolution of the monetary policy framework in canada. in the late 1990s, this framework was well described

labor demand in certain industries or regions, thereby leading to increased unemployment and hindering the re - allocation of labor from declining sectors to expanding sectors. research by staff at the federal reserve board has found evidence that downward nominal wage rigidities exist in the united states ( estevao and wilson, 1998 ; lebow, saks, and wilson, 2003 ). however, the evidence for the mechanism through which low inflation raises the natural rate of unemployment is not at all clear cut. inflation not only can " grease " the labor market and thus allow downward shifts in real wages in response to a decline in demand along, but it can also put friction in the system ( " sand " ) by increasing the noise in relative real wages ( groshen and schweitzer, 1999 ). the noise reduces the information content of nominal wages and hence the efficiency of the process by which workers are allocated across occupations and industries. see kuroda and yamamoto ( 2003 ) for analysis of the japanese experience, fehr and goette ( 2005 ) for analysis of the swiss experience, and kim and ruge - murcia ( 2007 ) for macroeconometric analysis of the implications of downward nominal wage rigidity for the united states. the fact that the deflation is anticipated does not completely rule out a negative effect on balance sheets : if the debt is sufficiently long - lived, there still is some redistribution from debtors to creditors. although these considerations are important for the design of monetary policy, a central bank can make use of other policy tools if the policy rate does become constrained by the zero lower bound ( bernanke, 2002 ). see reifschneider and williams ( 2000 ), eggertsson and woodford ( 2003, 2004 ), coenen, orphanides, and wieland ( 2004 ), wolman ( 2005 ), and the citations therein. push the short - term nominal interest rate below the level of expected inflation, thereby reducing real interest rates enough to mitigate the impact of the shock. but if the central bank has an inflation objective very close to zero, the zero lower bound can prevent the full implementation of this policy response, and hence the economy will tend to exhibit greater volatility of economic activity and inflation. in contrast, given shocks like those seen over the past several decades, an average inflation rate higher than about 1 percent substantially reduces the frequency with which the economy hits the zero lower bound. an inflation objective of about 2 percent implies that monetary