relevant question is not whether the new strategy does better than discretionary inflation targeting, but rather how the proposed strategy compares to the optimal commitment solution which monetary policymakers strive to attain. a recent study by the federal reserve board has shown that if explicit account is taken of the zero interest rate bound, optimal monetary policy under commitment may involve considerable price - level drift following a more substantial contractionary demand shock. consequently, returning the price level to its target path, as required under price - level targeting, is associated with welfare losses. based on an extension of the new keynesian model that allows for sector - specific shocks, a recent study by bundesbank staff confirms the welfare costs of eliminating an optimal price - level drift 2. it is not clear at present whether the costs associated with returning the price level onto the target path would be outweighed by the benefits which accrue from the reduction in longterm price - level uncertainty. against this background, price - level targeting cannot be regarded as a viable monetary policy strategy until we know much more about its potential gerberding, c, r gerke and f hammermann ( 2010 ), on the welfare costs of price - level targeting, deutsche bundesbank, mimeo. benefits and costs than we do at present. but it is definitely worth pursuing this line of research further in the future. 2. 3 asset prices, financial stability and monetary policy another question that has been raised once again by the financial crisis concerns asset prices and their relevance to monetary policy. first of all, the well known arguments against a “ leaning against the wind ” strategy are still valid : financial bubbles are difficult to identify and difficult to moderate using monetary policy instruments. nevertheless, there is empirical evidence on the link between money and credit growth and asset price booms. this suggests that monetary policymakers should take due account of developments in the financial markets and in asset prices – as part of their price stability mandate. one of the lessons of the recent crisis may be that the time horizon relevant to monetary policy decisions should not be too short. looking beyond credit and monetary developments, there are more interdependencies between monetary policy and the financial cycle. therefore, we must improve our understanding of the impact of monetary policy on banks ’ behaviour and vice versa. on the one hand, recent experience has clearly shown that financial imbalances can trigger an economic downturn and thereby endanger price stability as a result of deflationary risk. on the other hand,

a significant drop in the homeownership rate. after fluctuating in a fairly narrow range around 64 percent for nearly three decades, the homeownership rate rose significantly between 1994 and 2004, reaching a peak of 69 percent. since then, however, the homeownership rate has retraced about half of its earlier increase as many former homeowners have moved into rental housing or made other living arrangements, such as moving in with family members. are there any bright spots in this gloomy picture? as the macroeconomy has begun to improve, albeit at an uneven rate, the share of homeowners becoming newly delinquent on their mortgages – that is, missing a payment for the first time – has decreased. in addition, low interest rates and lower house prices have made homeownership potentially more affordable. in fact, by one measure, housing is hovering around its most affordable level in the 22 - year history of the series. 5 of course, tight credit standards have precluded many households from taking advantage of the affordable conditions. over time, however, as the economy continues to grow and credit conditions improve, more households should be able to benefit from the greater affordability. the housing market in low - and moderate - income communities as i indicated earlier – and as many of you already know – these sobering national trends have had even more devastating effects in low - and moderate - income neighborhoods. to investigate this issue further, researchers at the federal reserve classified neighborhoods into three broad categories : low and moderate income, middle income, and high income. 6 a comparison of housing and mortgage market conditions in low - and moderate - income neighborhoods with conditions in high - income neighborhoods reveals several interesting facts. 7 one notable fact is that house prices in low - and moderate - income neighborhoods rose more than in other neighborhoods during the national boom in house prices, and subsequently fell more during the bust. for example, from 1998 through 2006, house prices, as measured by the corelogic repeat - sales house price index, rose 11 percent per year on average in low - and moderate - income neighborhoods, compared with 9 percent per year in high - income neighborhoods. likewise, during the bust from 2007 to 2010, house prices fell 8 percent per year in lower - income neighborhoods, compared with 7 percent per year in high - income neighborhoods. house price changes also varied more across lower - income neighborhoods than high - income neighborhoods, implying that a greater share of lower -