1 At the conference, Professors Carmen and Vincent Reinhart presented the results of a broad-based study of output growth and other economic variables during the ten years before and after economic crises (40–70 countries in connection with major global crises, and 16 individual country crises). 2 The findings are very clear: economic activity has a tendency to be much weaker in the decade after a financial crisis than in the decade beforehand. There are probably a number of explanations for this:  1  See http://www.kansascityfed.org/publications/research/escp/archive.cfm. 2  See Reinhart, Carmen M., and Vincent R. Reinhart (2010): After the Fall, http://www.kansascityfed.org/publicat/sympos/2010/reinhart‐paper.pdf. BIS Review 130/2010  1    GDP growth is often abnormally strong and, to a degree, unsustainable in the prelude to a financial crisis.   Financial crises are preceded by debt accumulation and followed by a long process of deleveraging.   Risk appetite subsides after a financial crisis, and what Keynes called “animal spirits” are tempered for a prolonged period of time.   Production capacity is destroyed in a financial and economic crisis.   Finally, economic policy becomes more complex, and there is more risk of error. Of course, these developments are not inevitable, and the ultimate outcome depends also on policy choices. For example, it is clear that a number of mistakes played a key role in shaping the disaster that unfolded following the crash of 1929.
The wider the fans, the more uncertain the forecasts are. If economic developments are broadly in line with projections, economic agents can also expect interest rate developments to be approximately as projected. On the other hand, the interest rate path may shift in relation to the current path if economic prospects change or if the effects of interest rate changes on output, employment and prices are different from those projected. Thank you for your attention. 4  BIS Review 34/2007  BIS Review 34/2007  5  6  BIS Review 34/2007  BIS Review 34/2007  7  8  BIS Review 34/2007  BIS Review 34/2007  9  10  BIS Review 34/2007  BIS Review 34/2007  11  12  BIS Review 34/2007  BIS Review 34/2007  13  14  BIS Review 34/2007  BIS Review 34/2007  15  16  BIS Review 34/2007  BIS Review 34/2007  17