"It ain't what you don't know that gets you into trouble.
It's what you know for sure that just ain't so."
- Mark Twain
Abstract
The speech questions three deeply held beliefs that underpin current monetary policy received wisdom: it is appropriate to define equilibrium (or natural) rates as those consistent with output at potential and with stable prices (inflation); it is appropriate to think of money (monetary policy) as neutral, ie as having no impact on real outcomes, over medium- to long-term horizons relevant for policy - 10-20 years or so, if not longer; and it is appropriate to set policy on the presumption that deflations are always very costly. Based on these considerations, the speech draws two conclusions: the well known trend decline in real interest rates is, at least in part, a disequilibrium phenomenon, not consistent with lasting financial, macroeconomic and monetary stability; and there is a need to adjust current monetary policy frameworks so that monetary policy plays a more active role in preventing systemic financial instability and its huge macroeconomic costs. This calls for taking financial booms and busts more systematically into account.
