A prolonged period of low interest rates, ample liquidity and prominent central bank intervention in markets has given rise to potential misallocation of credit and wider resources toward zombie firms.5 Risk premia are compressed to a point where they no longer reflect the assets’ inherent risk characteristics.
The dynamics of preventing financial markets to adequately price risks for an extended period of time takes our economies into largely uncharted territory. These financial stability risks also need to be considered when assessing our monetary stance.