– more exactly the ( mis ) interpretation of conditional as unconditional statements – in the outside world. but i think it ’ s clear enough that central banks have rarely if ever committed themselves unconditionally to future policy. it ’ s clear too that, on several occasions, the outside world has nonetheless viewed these statements as promises. i ’ ll give some examples before a short concluding section. credible, “ low - for - long ” guidance as a means of easing policy at the lower bound so let ’ s start with the value of commitment when the policy rate is close to the lower bound. as you know, the last thirty years have seen a marked decline, around the world, in the underlying, “ equilibrium ” real rate of interest ( sometimes called “ r * ” ). this a real phenomenon, not a monetary one, caused by some combination of a greater desire to save – across the world as a whole – and weaker investment demand. but central banks have still had to accommodate the decline and the appropriate nominal rate of interest has therefore fallen alongside this “ r * ” [ 7 ]. however, there ’ s a limit to how far the nominal rate can fall. as long as people also have access to physical cash, bearing zero interest, it ’ s not possible to lower the official rate much below that level. and when the “ normal ” policy rate is already close to that lower bound there ’ s very little room for conventional policy to respond to negative, disinflationary shocks. this in turn creates the potential for deflationary traps. because the policy rate can ’ t fall in response, a decline in inflation expectations pushes up real interest rates, depresses demand and inflation, and this justifies the original ( and self - perpetuating ) weakness of expectations. these traps are potentially very costly as they can lead to protracted periods of unnecessarily weak economic activity. it was in a determined effort to avoid them, having already cut interest rates as far as they could, that central banks then turned to alternative, “ unconventional ” monetary policies. for the most part this meant qe. asset purchases are designed to keep a lid on forward rates, thereby supporting demand and activity. in the academic literature, however, many economists argued for an alternative – and potentially more powerful – option, namely a committed form of forward guidance. the economist michael woodford has been one prominent advocate [ 8 ]. remember that the name of the game,

bank rate. monetary policy affects inflation with a long and somewhat variable lag and there is little the mpc can do to offset unanticipated movements in near - term inflation. instead, we have to look at inflation prospects two or three years ahead. but it is in the nature of asset prices, including house prices, that one can say rather little about their likely direction of movement that far ahead. most of the time, the best projection of asset prices at that horizon is for them to be broadly flat. consequently, i suspect that our policy choices would not have been radically different had we been tasked with targeting an inflation measure that included a measure of owneroccupied housing costs. finally, there is something of a logical error in moving from the indubitably correct observation that successful inflation targeting is insufficient to guarantee either macroeconomic stability or financial stability to the conclusion that monetary policy should in addition, or instead, be focussed on some other objective. there is a real danger in overburdening monetary policy if it is expected to achieve both price stability and financial stability simultaneously. with two objectives, one needs two independent means of achieving them. the assignment of instruments to targets then revolves around which instrument is most effective at achieving which objective. though loose monetary policy, particularly in the united states during 2001 – 5, arguably contributed to the build - up of the financial imbalances, it was but one of many causes, including a plethora of failings within financial institutions. these include : inadequate care in the extension of loans to risky individuals, when those loans are then sold on ; the inappropriate use of off - balance - sheet vehicles to circumvent capital requirements ; reward packages that encouraged an undue focus on short - term returns ; excessive complexity and opacity in some asset - backed securities ; and distorted incentives facing ratings agencies. although regulators and supervisors conspicuously failed to address these issues during the run - up to the crisis, prudential regulation and supervision should surely be the first line of defence, as they can be focussed directly on the source of the problem. regulatory policies have a comparative advantage in combating excesses in financial markets. by contrast, inflation is, in the long run, a monetary phenomenon, so it is more naturally suited to the pursuit of price stability. beefing up the regulatory regime so it is better suited to preventing the re - emergence of financial excesses is very much work in progress. there are sound arguments