Along that path lies excess – excess trading, excess credit and excess volatility. What evidence exists on these phenomena? Patience and puzzles One source is the enormous literature on financial market efficiency. If markets were efficient, asset prices would mirror fundamentals. This would be indirect evidence against impatience, which tends to cause prices to deviate persistently from equilibrium. In fact, empirical finance is full of puzzles – economist code for deviations from market efficiency. And, interestingly, many of these observed puzzles are consistent with impatient dynamics. They include:   Excess volatility puzzle: There is strong evidence that asset prices, both real and financial, are both considerably more volatile than fundamentals and can deviate for persistent periods. 25    Serial correlation puzzle: There is strong evidence that asset prices do not follow a random walk, but instead exhibit short-term positive correlation (for example, due to momentum traders) and medium-term negative correlation. 26    Equity premium puzzle: The required yield on equity over safe assets is greater than can be explained by conventional asset pricing theory – a puzzle which some have explained using hyperbolic discounting. 27    Excess sensitivity puzzle: Contrary to standard theory, consumption is “excessively” sensitive to movements in income, violating the predictions of the permanent income model – a puzzle which impatience and under-saving can also help explain.
We have already seen a significant number of positive effects from these monetary policy decisions. Financial market conditions and the cost of external finance for the private economy have eased further, also following our previous monetary policy measures. In particular, borrowing conditions for firms and households have improved considerably. Moreover, money and credit dynamics have been firming. The substantial additional easing of our monetary policy stance supports and reinforces the emergence of more favourable developments for the euro area economy. In an environment of improving business and consumer sentiment, the transmission of our measures to the real economy will strengthen, contributing to a further improvement in the outlook for economic growth and a reduction in economic slack. Thereby, our measures will contribute to a sustained return of inflation towards a level below, but close to, 2% over the medium term and underpin the firm anchoring of medium to long-term inflation expectations. Let me now explain our assessment in greater detail, starting with the economic analysis. According to Eurostat’s flash estimate, real GDP in the euro area rose by 0.3%, quarter on quarter, in the last quarter of 2014, which was somewhat higher than previously expected. The latest economic data and, particularly, survey evidence available up to February point to some further improvements in economic activity at the beginning of this year. Looking ahead, we expect the economic recovery to broaden and strengthen gradually. The low level of the price of oil should continue to support households’ real disposable income and corporate profitability.