depression of the 1930s, to the great recession of 2007 – 2009 and today ’ s climate of political uncertainty. popular narratives can drive economic developments. for example, when people hear stories of declining prices and then postpone their purchases : talking about deflation feeds deflation. but the relationship is more than just one way : actual events play some role in the development of popular narratives. overall, popular narratives act as potent multiplier of economic shocks – the “ animal spirits ” of keynes. today ’ s information and communication technologies have opened up a vast field of research into the role of narratives as determinants of economic developments. these technologies have also greatly accelerated the diffusion of narratives in our societies ; it is surprising how easily fake news can flourish nowadays. this is a serious matter. the outcome of the uk referendum can be partly attributed to the decades - long development and spread of negative popular narratives about european integration. more generally, the events i mentioned earlier are the culmination of a broader antiestablishment and anti - globalisation narrative that has gained more traction in advanced economies. as narratives often are key determinants of economic and political outcomes, it is important to be wary of them. 3 / 7 bis central bankers'speeches the stabilising role of institutions institutions contribute to stability, especially in times of uncertainty, and help anchor expectations. in times of political gridlock, effective institutions are vital since they can deliver their mandates decisively and outside of the push - and - pull of the political process. this in turn foreshortens the crisis and the self - fulfilling cycle of weak economic performance and gloom - and - doom narratives. for example, while bank failures are always possible, the existence of appropriate institutions can mitigate their impact. a sound supervisory framework, for instance, makes failures less likely, while resolution plans contribute to seamless unwinding of failed institutions. this is also true of shocks exogenous to the economy. in the case of natural disasters such as earthquakes, 8 building standards – properly enforced – can reduce deaths, and disaster recovery plans can help after the event. the move over recent decades to grant independence to central banks owes much to the problem of time consistency. when monetary policy was under the control of governments, there was always an incentive to “ cheat ” and deliver higher than expected inflation to temporarily increase output. the existence of this incentive, and the inability of governments to credibly commit to the right policy, gave rise to de

although monetary policy frameworks oriented towards the medium term could probably not have completely prevented the current crisis, i am convinced that they would have helped to make it less disruptive. see kydland f. and e. prescott ( 1977 ), “ rules rather than discretion : the inconsistency of optimal plans ”, journal of political economy, 85, pp. 473 – 492 ; and barro r. and d. gordon ( 1983 ), “ rules, discretion and reputation in a model of monetary policy ”. journal of monetary economics, 12, pp. 101 – 121. see for instance blanchard o., dell ’ ariccia g. and p. mauro ( 2010 ), “ rethinking macroeconomic policy ”, imf staff position note, no 10 / 03. see rajan r. ( 2005 ), “ the greenspan era : lessons for the future, ” speech delivered at the federal reserve bank of kansas city symposium on “ rethinking stabilisation policy, ” jackson hole, wyoming. bis central bankers ’ speeches typically, policies of short - term demand management rely heavily on inflation forecasts and output gap measures. experience, especially prior to the crisis, has revealed the risks of constructing policy on indicators and variables which are not sufficiently robust. let me take the output gap as an example. as the literature has clearly shown, the empirical proxies used to capture the output gap are subject to constant revisions. 6 policy - makers who base their decisions mainly on such assessments of the cyclical position can be led very much astray. for instance, the great inflation of the 1970s occurred, to a large extent, due to measurement errors in the real - time estimates of the output gap combined with an overreaction to output gap measures when assessing the state of the economy. 7 arguably, the same can be said of the low interest rates implemented for a prolonged period in the middle of the previous decade. 8 monetary policies aimed at fine - tuning short - term objectives also run a serious risk of inducing too much policy forbearance for too long. exiting an extraordinary accommodative mode too late can sow the seeds of future imbalances. as the economy recovers from an exceptionally deep recession, real time output gap estimates and estimates of structural unemployment or the non - accelerating inflation rate of unemployment ( nairu ) are particularly uncertain. potential output is likely to have fallen for a variety of reasons. this