Specifically, demographic developments in recent decades in comparable countries, characterised by declining birth rates, increasing life expectancy, and a rising ratio of pensioners to workers, seems to have lowered the longterm equilibrium or “natural” interest rate and is likely to continue to do so in the future. Demographic patterns seem therefore to be contributing to a progressive narrowing of the  9/14  scope for central banks to lower their interest rates in the event of deflationary shocks like those suffered during much of the recent crisis. One tool which can mitigate this foreseeable loss of scope for interest rate policy forward guidance. In recent years, once short-term rates reached their lower limit, central bank announcements undertaking to keep interest rates at low levels for long periods proved effective at flattening the yield curve and reducing the uncertainty over possible future interest rate developments, thus improving financial conditions for the real economy. Other tools that also provide stimulus when interest rates are no longer able to do so include the monetary authority’s balance-sheet expansion measures. In recent years, the world’s main central banks, including the ECB, have resorted to them with remarkable intensity. In particular, in the Eurosystem the expansion of the balance sheet has mainly been driven by longer-term refinancing operations and the asset purchase programme. These measures have been effective at easing financial conditions in the euro area and, ultimately, at adjusting inflation towards its target.

When the last crisis broke out, central banks slashed interest rates, which rapidly reached near-zero levels In some cases, such as that of the European Central Bank (ECB), rates even turned negative. In this context, central banks had to implement a series of novel, or “unconventional”, measures. These measures included asset purchase programmes, medium- and long-term lending to the banking industry under advantageous conditions, and announcements about the future course of monetary policy, known as forward guidance. The empirical evidence shows all these measures to have been effective at cushioning the impacts of the economic crisis and supporting the subsequent recovery, and they now form part of central banks’ toolkit for the future. Against this background, what scope is there for monetary policy action in the event of a future crisis? As the inflation outlook improves in the future, interest rates may be expected to rise gradually towards their long-term equilibrium rate. The distance between this level and the effective lower bound on interest rates – i.e. the level below which further rate cuts would be counter-productive as a means of stimulating the economy – will determine the future scope for conventional monetary policy. We now know that the lower bound on interest rates in the euro area is not zero, as was traditionally believed, but a negative number which, although difficult to quantify, is probably not far below the current deposit facility rate of 0.40%. Economic theory and the empirical evidence suggests that demography is one of the factors underlying the long-term interest rate.