It is a great privilege to have been invited to this timely conference to discuss an issue of considerable importance.

Did the inflation-targeting regime play any role in setting the stage for the current crisis?

The current financial crisis has several causes, and it would be a mistake to focus on a single factor. At first sight, however, monetary policy was too loose in several countries, and, as a result, housing and credit market bubbles were allowed to develop. Had interest rates been higher during the boom, it is plausible that the bubbles would have been more muted, and, therefore, the damage caused to the real economy when the bubbles eventually burst would probably have been more limited. Moreover, interest rates would have been higher when the bubble burst, so there would have been more scope to cut them in an attempt to stimulate the economy before having to resort to the largely untested policy of quantitative easing.

Note that the inappropriate monetary policy does not represent a failure of inflation-targeting regimes per se (at least when targets have been set to be achieved over the medium term rather than at a fixed horizon). Instead, the problem appears to be that several central banks failed to operate an inflation-targeting regime in an appropriate manner. After all, several years ago some of us (see, for example, Cecchetti et al. 2000 and Cecchetti, Genberg and Wadhwani 2002) argued that inflation-targeting central bankers should ‘lean against the wind’ in response to asset price bubbles.