Unlike the post crisis period when policy rates would have needed to be deeply negative to follow the natural rate, monetary policy is now more able to be close to the natural rate and so to keep demand and supply in balance. But it can only do so with very low interest rates or, in the case of some advanced economies, with slightly negative rates and QE. There is a simple cross check on the model estimates of the natural rate – the actual evolution of inflation, output and interest rates over the past few years. The natural rate as John H Williams observed in response to Keynes and with some despair, is:  5  See Figure 1 at the end of the speech for an illustrative breakdown of some of the factors affecting the appropriate real policy rate. 6  For example, see http://bankunderground.co.uk/2015/08/11/an-estimate-of-the-uks-natural-rate-of-interest/. 6  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  6  “an abstraction; like faith it can only be seen by its works. One can only say that if the Bank policy succeeds in stabilizing prices, the bank rate must have been brought into proper line with the natural rate, but if it does not it must not have been.”  7  In the period since the UK recovery gathered pace in 2013 and the August Inflation Report this year, Bank rate was at ½% and the stock of QE unchanged.
In particular, governments need to foster innovation by providing the right framework to encourage experimentation and risk-taking in new and growing sectors, and to support the transition to new jobs for people working in “sunset” sectors. In parallel, they need to ensure that the conditions are in place to direct investment towards the technologies and sectors of the future. 2/4  BIS central bankers' speeches  This requires sufficient financing. The European Commission estimates that the investment needs for delivering the digital transformation as well as the green transition will be at least € trillion over the next two years.2 But in a number of countries – Italy among them – mobilising investment requires above all a business-friendly economic environment, with efficient and agile public and private services, adequate physical and digital infrastructures, a well-functioning judicial system and a strong financial sector. If such actions are taken, this crisis can engender a period of positive transformation. It offers an opportunity to policymakers to take a decisive step forward towards more inclusive, greener and more digital growth.