Hence, the ECB – like other major central banks before us – must rely on unconventional monetary policy initiatives to provide additional accommodation. Inherent in these unconventional measures is that they work through channels that are still under-studied compared to the well-known channels of conventional monetary policy measures. This, in turn, gives rise to various dimensions of uncertainty.
Earlier, I argued that the increase in euro area government deficits during the crisis was largely automatic rather than being due to discretionary fiscal stimulus measures. Unfortunately, what automatically goes up does not always automatically come down. The crisis has put our economies on a lower path of potential output, although we still don’t know exactly what this path is.