However, long periods of low interest rates unavoidably create incentives for risk taking and “search for yield”. That dilemma can, in principle, be solved through proper macroprudential policies. I will return later to challenges we face in that specific area. The meaning of price stability Let me start with a crucial point. Central banks have a strong mandate to preserve and achieve price stability. Strict adherence to this mandate – and the clear willingness to fulfil it – is their main protection against the dangers created by the zero lower bound. As we all know, inflation is ultimately driven by expectations. Inflation expectations were remarkably stable during the whole first decade of the euro. Today, the major risk in the euro area is a downward drift that would durably set long-run inflation expectations at a level below our objective of price stability. We do not know much about how expectations are formed. However, I have no doubt  BIS central bankers’ speeches  1  that the perceived reaction function of the central bank plays a major role in anchoring price stability. Second, symmetry is of the essence. For a significant period of time, we have been well below our definition of price stability in the euro area, both in terms of effective inflation and long-term expectations. There is a temptation to take a benign view of this situation and consider that low inflation is beneficial per se, irrespective of its level.
This may come at a cost in the longer run, however, as price rigidity impedes the adjustment process and reduces the efficiency of monetary policy. A large part of the perceived differences between the FED and the ECB in terms of policy reactions results, in fact, from differences in price flexibility. Because of specific rigidities in Europe, the fall in inflation that normally follows a decline in output materialized later and more slowly. Moreover, it notably happened after several governments had implemented a series of structural reforms and adjustment policies in 2010–2011. This explains part of the delay in implementing non-conventional measures in Europe, as compared to the United States. A third challenge comes from managing the risks that low interest rates and nonconventional policies imply for financial stability. Significant advances have been achieved in developing proper macroprudential frameworks and instruments for the banking sector. Strong capital and liquidity requirements have increased its systemic robustness. New countercyclical tools have been developed. Progress has been made towards reducing moral hazard through proper resolution mechanisms for large and systemic institutions. However, the timeliness and efficacy of macroprudential measures on specific areas of exuberance, such as real estate, are still being put to the test. More importantly, I see one blind spot. Risk has not fully disappeared but rather has morphed and migrated to new parts of the financial system. Specifically, maturity transformation has developed outside the banking sector and by direct market intermediation.