In fact, it is failure to make full use of monetary policy in the face of falling demand and inflation expectations – rather than its supposed lack of effectiveness – that would trap us in an environment of low inflation, subdued growth and high unemployment. Preserving favourable financing conditions will have a powerful effect on demand and inflation.
However, given the fall of the natural rate of interest,[14] monetary policy is more effective if deployed in sync with other policies. Monetary, fiscal and structural policies must reinforce each other in order to cut slack and close the gap between saving and investment. So far, Europe has taken the right direction.