7  I say “respond” but, as a broad generalisation, the Gold Standard allowed for no significant degree of monetary autonomy: there might be a number of explanations for the pro-cyclicality of real short-term interest rates but they were not, by and large, a matter of free choice of the central bank (Obstfeld et al (2005); for a recent and interesting discussion, see also Morys (2012)). My point is that, had there been a lower neutral real rate, the Gold Standard would have delivered a worse outcome in co-ordinated downturns because the lower bound may have been a constraint. BIS central bankers’ speeches  5  Perhaps the authorities of the time were just lucky not to have run into the zero lower bound. But I think this episode illustrates that even protracted declines in prices needn’t be especially costly if, for whatever reason, the appropriate real interest rate is relatively high. Sustained deflation more costly when interest rates close to the lower bound Clearly, we are not in the same position today. Cuts in interest rates after the financial crisis were crucial in preventing a much worse downturn. They depressed the real short rate, softening what might otherwise have been a steeper rise in the saving rate. Matching the decline in productivity and income growth (Chart 6), the resulting falls in household interest rates meant deleveraging could occur without a big jump in gross debt repayments 8.
Critical infrastructure such as transport, water, power and telecommunications systems are also likely to be affected. Nearly all aspects of the economy in every country are therefore potentially at risk because of the widespread dependence on a country’s core infrastructure. The unprecedented scope of the Year 2000 problem means that a critical aspect of the issue is the management challenge. Substantial management resources are needed to coordinate the efforts to assess, repair, and test affected systems prior to the fixed deadline of BIS Review 85/1998  -2-  January 1, 2000. At the Federal Reserve, for example, we have created a number of management positions within our organization that are focused exclusively on different aspects of our Year 2000 preparations. A final point that underscores the need for urgent and sustained action is the increasing focus on the issue by the media, by the public and by market observers such as the rating agencies. Over the course of 1999, the extent of Year 2000 preparations by financial organizations will become the subject of ever more intensive scrutiny. As supervisors, therefore, we must do all we can to support the efforts of market participants to address the problem effectively, and to build confidence among others that this is being accomplished. While we must make it clear that supervisors cannot solve the problem, we can help mobilize others to take the necessary steps.