Dr. Eddie Casey:

It does, I suppose. One of the things we often talk about with the rules is that there can be sensible get-out clauses for these things. We do not think they are going to be perfect and capture every circumstance, but it should be possible to design a reasonably simple rule that works most of the time, with an allowance for exceptional periods, a lot like the energy shock. That was a good example of a time when things should be looked at, a step back taken and an acceptance that inflation of the type coming from an external energy shock is something very different and that the rule may perhaps not be equipped to deal with it. This is what we would have said at the time.

In normal times, however, having an assumption of 2% inflation can actually be a good feature and not a bug in the rule. This is what we would have said, in the sense that if a lot of demand is being added to the economy and if unemployment is very low and employment is very high, it is possible to end up in a situation where there is very high inflation. It is then a good idea to pull back on the rule and do a bit less than allowing for all that inflation and chasing it. The reverse of this is true as well. If inflation happened to be low, that could be a sign that not enough demand is being added to the economy-----