We have a greater appreciation of this risk now than we did before the global recession, when we were more concerned about the upside risks to inflation. If we were actually in a situation of secular stagnation, well, we would need to consider a different policy framework.
One option that has been put forward would be to raise the inflation target in order to deliver negative real interest rates, since nominal interest rates can’t go below zero.12 Not only would we face the costs of higher inflation, we would also risk stoking financial imbalances.13 We are weighing the risks to financial stability posed by a low interest rate environment.