But lowering rates to such low levels can cause some problems. It can generate excess credit expansion or asset price inflation or imbalances elsewhere in the economy. The current experience of Canada, Hong Kong and Switzerland is salient in this respect. The next line of argument is that such concerns can be alleviated by the appropriate deployment of “macroprudential” policy tools.
Our estimate of potential growth has declined substantially over the past two decades – in part due to the decline in multifactor productivity growth. The public sector debt ratio remains elevated, while our population is ageing. Overall, structural indicators still reveal substantial gaps, both between euro area countries and relative to best performers.