Credit as a burden for an entire economy  The examples show that an actual or impending default on a loan can represent a serious burden for the party concerned or even a personal tragedy. To a certain extent, this explains the negative connotations associated with debt. However, from a macroeconomic perspective, default by a single borrower does not usually pose a problem. Unless the single borrower happens to be a massively indebted state or big bank. An impending default by such a player has a far-reaching impact on the economy as a whole, as witnessed in the recent financial crisis. Debt also becomes a macroeconomic problem when a large number of economic agents help themselves too generously at the credit buffet table. Such phases of excess on the credit market usually end with a large number of borrowers encountering payment difficulties. For the rest of my presentation, I would like to concentrate on this type of debt crisis and on the costs involved. Empirical literature indicates that recessions run particularly deep when they are connected with just such a debt crisis (cf. slide 9). Moreover, the subsequent economic recovery tends to be sluggish. This applies all the more when the debt crisis also hits the banking sector. 9 Why is this so? In a debt crisis following a credit boom, not just a few, but a large number of households and companies face payment difficulties and have less income and assets at their disposal.
First, requiring that we see inflation reaching two per cent not only “well ahead of the end of our projection horizon” but also “durably for the rest of the projection horizon” ensures that interest rate policy will not react to inflation shocks that are expected to fade away before the end of our projection horizon. Second, the condition that “realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term” serves an important purpose in our analysis of the incoming data: it sharply differentiates between the volatile components of headline inflation and the dynamics of underlying inflation, which is the persistent component that is the best guide to medium-term inflation dynamics. The inclusion of a condition that is based on realisations of underlying inflation takes into account the intrinsic uncertainty of economic forecasts, especially during periods of structural change that generate “disparate confounding dynamics”.1 Since the services sector constitutes a large share of the overall price level and since wages (adjusting for productivity) are the principal component in the price of services, the persistent component in wage dynamics plays a central role in the determination of underlying inflation. Accordingly, tracking wage outcomes and differentiating between transitory and persistent shifts in the growth rate of wages will play an important role in assessing progress in the realised path of underlying inflation.