An important outcome is shown in this chart. The chart compares two different paths for consumption during a recession. The blue line shows the average path, while the yellow line shows the path following a period of high debt growth. The results confirm that high debt growth ahead of a recession leads to a deeper downturn. It also takes longer for the economy to recover. 3/5  BIS central bankers' speeches  Chart: Monetary policy and financial stability When financial imbalances are building up, the probability of a deep recession may increase. This is illustrated in this chart by the blue lines. The uncertainty bands around inflation and the output gap are highly assymetrical. Monetary policy can dampen vulnerabilities by keeping the interest rate somewhat higher than would otherwise have been the case – in other words, by “leaning against the wind”. This policy is illustrated by the red lines. By keeping the interest rate higher, the risk of a deep economic downturn is reduced. The uncertainty bands are more narrow and symmetric. But this policy also entails a short-term cost: capacity utilisation is lower, and inflation may stay below target. The aim of “leaning against the wind” is to achieve an improved path for inflation, output and employment over time. This is in line with our central bank mandate. Flexible inflation targeting with a sufficiently long horizon should take financial stability into account if the situation so allows and so warrants.
Today, on the basis of a Progress Report, we have reviewed the advances of the banking industry against the objectives set by the Eurosystem and we have identified the outstanding issues that need quickly to be addressed. A press release on this topic will be issued later on today. The Progress Report will be available on the ECB’s website shortly. 3  BIS Review 74/2000