as safeguards against the inflationary booms triggered by weak government finances. transparency helps in another way. many central banks communicate to the public what level of inflation they are aiming for. for instance, the bank of canada and the bank of england have adopted inflation targeting and announced what their targets for inflation are. similarly, the ecb and the swiss national bank have announced that price stability is the overriding target for monetary policy and defined it numerically. 8 since the inflation objective is public knowledge, public scrutiny will force central banks to tighten monetary policy if inflation rises above target for a protracted period. periods of negative interest rates were prevalent between 1945 and 1980, and more recently since 2008. reinhart and sbrancia ( 2011 ) find that real interest rates were negative roughly half of the time between 1945 and 1980. annual liquidation of debt via negative real interest rates amounted to 3 - 4 % of gdp per annum in the us and the uk. there is a very long literature that establishes the close link between public deficits and inflation, see sargent and wallace ( 1981 ), sims ( 1994 ), woodford ( 1994, 2001 ), and catao and teronnes ( 2003 ). for a discussion of fiscal deficits and hyperinflation, see sargent ( 1982 ) and dornbusch and fischer ( 1986 ). the ecb ’ s objective for inflation is “ below but close to two per cent. ” inflation surveys suggest that financial market participants believe that the ecb aims for inflation of about 1. 7 to 1. 9 % per annum. bis central bankers ’ speeches to my mind, the risk with high levels of public debt is not that average inflation rates will rise, but rather that central banks ’ control of inflation will worsen. it is easy to see why. if inflation rises, the central bank must determine whether the increase is likely to be lasting or temporary. 9 in the latter case, there is no need to increase interest rates since inflation will return to the previous level on its own. in practice, of course, it is difficult to know whether increases in inflation are permanent or transitory, so policy makers have to judge whether to raise interest rates immediately, or to wait and see how the situation evolves. if public debts are large, monetary policy makers may worry that higher interest rates will worsen the fiscal situation by increasing the cost of debt service and by slowing the economy and therefore dampening tax revenues. as a result, there is

alan bollard : learnings from the global financial crisis paper by dr alan bollard, governor of the reserve bank of new zealand, and mr tim ng, for the sir leslie melville lecture at the australian national university, canberra, 9 august. * 1. * * introduction the global financial system went through major convulsions in 2008, putting great pressure on an already weakening global economy. a massive global economic recession followed, contributing to the emergence of a sovereign debt crisis in the euro area. european sovereign debt problems remain a dark cloud overhanging the world economy. these extreme events have provoked us to re - think what is known and where economic research should focus, in some cases fundamentally. we had long known that banks that appear individually sound can be vulnerable to problems affecting the whole banking system, and that such problems can amplify economic shocks. but the crisis sharply accelerated the study of financial fragility, contagion and instability nonetheless. the crisis has also challenged us as financial regulators and monetary and fiscal policymakers. we are all working to understand, contain and repair the damage to financial systems, to economies and to governments ’ financial capacity. the policy choices in many areas involve difficult and uncertain tradeoffs. this paper discusses some lessons from the crisis experience to date, and some analytical and policy challenges. australia and new zealand escaped the worst of the financial crisis, but not without extraordinary policy actions of our own at various times, and not without a certain legacy of issues to deal with in our own neighbourhood. we find it useful to structure the discussion in three parts : the episode of near - seizure in many advanced - country financial systems in 2007 – 08 ; the global recession of 2008 – 09 ; and the current situation of extreme fiscal weakness in many parts of europe. ( of course, real events have not been as simple and linear as that structure might suggest – expectations and feedback loops have played a substantial role. ) we conclude with some reflections about research and policy strategy in this new world. 2. financial system disruption, 2007 – 08 global financial markets sharply became unsettled in july and august 2007, when a number of large us and european financial institutions suspended redemptions in investment vehicles linked to us mortgage debt and their derivatives. through the following year, concerns mounted about the extent and complexity of global bank exposures and vulnerabilities to growing economic weakness. these concerns soon embraced a very wide sweep of financial products in the us and elsewhere. bear stearns