This may not be detrimental to long-term growth if it has a “cleansing effect”, if non performing firms and equipment disappear and free resources for innovative young firms 3. However, it may also hit young, innovative and risky firms, which are more fragile and financially dependent 4. According to Foster, Grim and Haltiwanger 5, reallocation in the United States during the Great recession  1  R. Jackman and R. Layard, 1991. “Does Long-term Unemployment Reduce a Person’s Chance of a Job? A Time-Series Test,” Economica, London School of Economics and Political Science, vol. 58(229), pages 93–106, February. 2  A. Maravalle, M.-E. de la Serve. and G. Verdugo, 2014. “The euro area Beveridge curve in the post-crisis period: increase in structural unemployment since 2010,” Quarterly selection of articles – Bulletin de la Banque de France, Banque de France, issue 36, pages 95–109, winter. 3  R. J. Caballero and M. L. Hammour, 1996. “On the Timing and Efficiency of Creative Destruction,” The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 805–852. 4  M. Ouyang, 2009. “The scarring effect of recessions,” Journal of Monetary Economics, Elsevier, vol. 56(2), pages 184–199, March. 5  L. Foster, C. Grim and J. Haltiwanger, 2016. “Reallocation in the Great Recession: Cleansing or Not?,” Journal of Labor Economics, University of Chicago Press, vol. 34(S1), pages S293–S331. 2  BIS central bankers’ speeches  was less intense and productivity-enhancing than in normal times, contrary to previous recessions.
When we changed over from keeping the repo rate constant in our forecasting work to basing the forecasts on market expectations, we had made the assessment that the advantages of this system outweighed the disadvantages, compared with using a constant repo rate assumption. The assumption of a constant repo rate worked well in as far as it made communication simple, which I believe was particularly important when establishing the new monetary policy regime and building up credibility for the inflation target. At the same time, it was of course usually an unrealistic assumption that made it difficult for us to make good forecasts. This applied in particular in cases where there were expectations of substantial repo rate adjustments. Normally, changes in the repo rate are required to guide inflation towards the target. If we had kept to this assumption for the interest rate, these difficulties would have been particularly prominent when we changed over to making forecasts in a slightly longer time perspective. Of course, the assumption of a constant repo rate also made it difficult to compare our forecasts with those of other forecasters and to evaluate our monetary policy. But, perhaps even more importantly, it gave no clear guidance as to how we viewed interest rate developments in the long term. The general public’s and the markets’ expectations of the future interest path are at least as important for the way monetary policy influences the economy as the expectations around the decision on the current interest rate.