movements along the Phillips Curve) and global integration along all dimensions – labour, final goods and services, and intermediates – acts as a series of positive supply shocks that impart sustained disinflationary pressures (i.e. shifting the Phillips Curve downwards and flattening it). And just as global factors affect the relationship between domestic slack and inflation, they have made it more difficult for central banks to set policy in order to achieve their objectives. Major secular forces have lowered the equilibrium rate of interest, meaning that central banks have had to use unconventional tools in order to provide stimulus. At the same time, open and integrated markets have reduced central banks’ control over their domestic financial conditions. In the wake of such disinflationary challenges some have argued that monetary policy frameworks should be overhauled. For example, Claudio Borio recently suggested that the secular disinflationary effects from continued global integration could dominate increased cyclical inflationary pressures from a smaller global 38  Bonis, B, Ihrig, J and Wei, M (2017). ‘The Effect of the Federal Reserve's Securities Holdings on Longer-term Interest Rates’ FEDS Notes. Washington: Board of Governors of the Federal Reserve System, 20 April 2017. 39 This analysis uses the IMF’s Flexible System of Global Models, a semi-structural model of the global economy that captures international trade and financial linkages. 15  All speeches are available online at www.bankofengland.co.uk/speeches  15  output gap as the recovery progresses.
However, the corporate sector faces major challenges down the road. Against a backdrop of lower expected cash flows and higher debt, the solvency position of some firms has worsened, especially in the case of those operating in sectors more adversely affected by the pandemic that are still facing some restrictions. Thus, with the crisis stretching out, concern has now shifted from liquidity risk to the deterioration of the solvency position of firms. Therefore, economic policies should now focus on supporting viable businesses whose solvency has worsened as a result of the COVID-19 shock, given that the potential liquidation of these firms would be a drag on economic recovery via different channels. First, due to the loss of employment and capital that follows the closure of any company. Second, firms’ solvency problems may end up affecting the health of lenders if these problems are significant and widespread within the corporate sector. And third, in extreme scenarios, the ability of of some banks to provide new lending could be affected, generating negative financial loops. We should take into account as well that a high level of corporate debt, even if not leading to defaults, can still be a drag on investment in the following years, lowering productivity and economic growth, as the experience from the global financial crisis indeed shows.