If, on the other hand, the real interest rate is below the natural rate, the monetary policy stance is expansionary, which may lead to the generation of inflationary pressures and, normally, for a time, higher economic growth than the economy can sustain without the emergence of imbalances. The intrinsic difficulty of this conceptual framework is that its central feature, the economy’s natural rate of interest, cannot be observed in reality, but only, in the best of cases, estimated indirectly. Accordingly, the central bank needs to analyse a broad range of indicators in order to infer the state of the economy, so as to be able to determine the appropriate monetary policy stance. This conceptual framework worked satisfactorily during the 1990s and the early years of the current century, a period known as the “Great Moderation”, characterised by stable growth in the advanced economies and relatively low levels of inflation. However, the economic and financial crisis that began in 2007-2008 forced central banks to adopt innovative policies and, on occasion, to navigate “uncharted waters”. This is the subject I wish to talk about in the final part of my speech. The monetary policy challenges arising from the crisis The magnitude of the crisis that began in 2007-2008 led the central banks of the main developed economies to design and implement expansionary monetary policies of unprecedented magnitude and scope. The crisis had a significant effect on banks and other financial intermediaries, leading to a contraction in credit and, therefore, in economic activity.
The Official Credit Institute’s programmes, aimed at smoothing small and medium-sized companies’ access to credit, have attempted to correct this market failing. Further work along these lines should be pursued, improving where possible the workings of these programmes and increasing their volume if necessary. Yet I must urge credit institutions to be responsible, as I have on previous occasions. Evidently, at a time such as the present, they must be particularly careful and, naturally, not  2  BIS Review 27/2010  extend credit to companies that are not solvent; but nor must they forget that should they fail to lend but a single euro to companies that are solvent, they will only be making things difficult for themselves. Another example of progress in financial reform backed by broad Parliamentary consensus has been the approval of legislation whose aim is to restructure the financial system at the least cost to taxpayers and in the shortest time possible, observing the constitutional distribution of powers, so that all institutions in the system are in a position to provide credit to households and firms when the recovery arrives.