In order to throw more light on this, I would like to explain briefly how financial imbalances could arise in the period of the “great moderation” despite stable prices – imbalances that ultimately became a threat to the real economy. The years prior to the outbreak of the current financial crisis were marked by low nominal and real interest rates and abundant liquidity.
The main driving forces were the accommodative monetary policy stance around the world in combination with excess savings in parts of the emerging world, in particular in emerging Asia – the so-called saving glut. 5 In this environment, investors intensified their search for yield and increasingly underestimated underlying risks.