bank published a document entitled “ renewal of the inflation - control target : background information. ” 1 it assessed the past performance of the framework, discussed the various issues that had been examined in the run - up to the renewal, and identified a number of key questions that needed to be studied over the next five years. the two most important questions concerned the potential benefits and costs of lowering the target rate of inflation from 2 per cent, and the potential benefits and costs of moving from an the document can be found at www. bankofcanada. ca / en / press / background _ nov06. pdf. inflation target to a price - level target. the distinguishing feature of price - level targeting is that, unlike inflation targeting, bygones are not bygones. any past mistakes must be corrected. if aggregate prices overshoot the targeted price - level path in one period, prices must come back to the path in future periods. several other issues were also identified, but were either deemed to be of lesser importance and promise, or to have been largely resolved. one of these was whether central banks should use their monetary policy instrument to lean against prospective asset bubbles and other forms of financial instability, even if this risked deviating from their inflation objective for an extended period. the events of the past three years have seriously challenged the received wisdom that existed on this issue prior to the crisis. some well - known economists have suggested that the pursuit of price stability is not enough, and is perhaps even dangerous to the stability of the financial system and the macroeconomy more generally. 2 consequently, the bank ’ s research program on the monetary policy framework now includes three key questions : ( i ) whether the inflation target should be lowered ; ( ii ) whether we should adopt a price - level target ; and ( iii ) whether the monetary policy framework should be modified to give greater recognition to financial - stability concerns. the state of play for each of these as of 2006 is outlined briefly below, and will serve as a helpful point of departure for the discussion that follows. is 2 per cent the optimal rate of inflation? achieving and maintaining a low, stable, and predictable rate of inflation promotes economic welfare by reducing uncertainty and preventing arbitrary redistributions of wealth. however, it isn ’ t clear that these benefits are maximized at an inflation rate of 2 per cent. while the benefits of targeting a lower rate of inflation were generally believed to be positive in 2006, three possible reasons were identified at the time

high inflation would be limited and signal a sense of urgency. 2 / 6 bis - central bankers'speeches the path but how does monetary policy anchor inflation expectations? it is not only about the policy destination, but also about setting the right trajectory of rates to get there. this brings me to the second specific feature of this cycle : the rate path. it was clear from the outset that merely communicating our commitment to reaching our target would not have been enough. ecb analysis shows that, if we had not reacted at all, the risk of de - anchoring would have been above 30 % in 2023 and 2024. 7 it is likely that even moderate policy action would have been insufficient. for example, if rates had stopped at 2 %, the risk of de - anchoring would still have been around 24 %. so, when we first started raising rates, we knew that we were far from where we needed to be. the most important factor was therefore to close the gap as quickly as possible. this is why we had a historically steep climb at the start of our rate path, using increments of 75 and 50 basis points for our first six rate increases. but as policy rates moved towards restrictive territory, the challenge shifted from acting quickly to calibrating the path precisely. in particular, we needed to set a rate path that both delivered a " timely " return to 2 % and did so with a high degree of confidence. this path also required us to take a different approach from the past. faced with multiple large shocks, there was significant uncertainty about how to interpret and rank the information we were receiving from the economy. on the one hand, it would have been risky to rely too much on models trained on historical data, as those data may no longer have been valid. we could not know, for instance, whether shifts in preferences, higher energy prices and geopolitics had changed the structure of the economy. on the other hand, relying too much on current data might have been equally misleading if they had turned out to have little predictive power for the medium term. as shocks worked their way through the economy, current data could also have reflected lags more than actual inflation trends. so we constructed a framework to hedge against this uncertainty, blending projections with current data about underlying inflation and monetary transmission. the aim was to combine various pieces of information about the medium - term outlook into a single assessment that could be updated swiftly. our forecasts provided a comprehensive assessment of