Second, we have a number of rigidities in nominal wages. We have a number of rigidities in some prices, so that fuels automatically certain rises in core inflation normally, and for the time being we have not seen that change significantly. Third, when we look at long-term inflation expectations, until now they have remained well anchored to our definition of price stability. So these three reasons make me think is that what would normally happen is that after a trough inflation will come back to somewhere close to our definition of price stability. But of course we have to remain cautious and be ready to act, and certainly if we felt there had  BIS Review 29/2009  3  been a change in these various elements we should ask ourselves if other non-standard monetary policy actions might be necessary. FT: Classic quantitative easing? CN: For instance? FT: Buying government bonds? CN: Possibly. FT: Axel Weber has said 1 per cent would be the floor for the ECB main policy rate. Others have said zero could be possible. Where do you stand? CN: I’m pragmatic. We have certainly not decided in advance that there is a minimum level that would be our floor. But there are a couple of things that we need to take into account. First, it is a general rule that the more you cut rates and you approach zero, the less efficient are the moves in terms of transmission into the real economy.
CN: What has been designed by various countries – bearing in mind the structure of their economies and the relative importance of the automatic stabilisers – is probably the right balance between what needs to be done to stimulate global demand and the necessity to retain the credibility of the fiscal policy and budgets over time. It is especially important in European countries where we have the feeling that the so-called Ricardian effects can play a role. So if we were to give the impression to citizens that public finances were to deteriorate by too much and for too long consumers might increase their savings ratio to prepare themselves for tax increases in the future that they might regard as inevitable, or the reduction of benefits and pensions. So you have to keep the right balance between long term credibility and immediate stimulation. As far as we can judge, that balance is probably appropriate. That will have to be reviewed according to future economic developments. A related issue is the fact we all agree that a condition for the revival of the global economy is that financial systems everywhere are stabilised and that stabilisation is convincing the markets. I have the impression that we are a little more advanced in that regard in Europe than in the US. It is clear that the US authorities are making every effort to reach that goal, but that is probably as important as the size of the stimulus itself if we want to stabilise the economy.