Increasing resilience to shocks In terms of resilience, the ability of each economy in a monetary union to adjust quickly to shocks is essential for price stability and, over time, for the long-term viability of the union. This is because, faced with a negative demand shock, a more flexible economy will tend to react by immediately lowering prices, but agents will then expect inflation to rise again as the shock fades, ensuring a firm anchoring of inflation expectations. By contrast, an inflexible economy is more likely to adjust through higher unemployment, which exerts a more prolonged downward pressure on inflation and is therefore more likely to weigh on inflation expectations. This in turn can lead to higher real interest rates and compound the effect of the shock. Whereas in a single country setting the central bank could respond directly to such a contractionary effect, in a monetary union monetary policy cannot be tailored to developments in particular countries. There are also no large-scale fiscal transfers across countries in the euro area to play a compensating role in supporting demand. This implies that economies with insufficient flexibility risk more prolonged disinflation, consistently higher unemployment, and over time, permanent economic divergence. 1  Bartelsman, E., J. Haltiwanger, and S. Scarpetta (2013), “Cross-Country Differences in Productivity: The Role of Allocation and Selection.” American Economic Review, 103(1): 305–34. 2  Haltiwanger, J. (2012), “Job Creation and Firm Dynamics in the United States.” Innovation Policy and the Economy, vol. 12. April 2012.

Companies were cautiously optimistic in the first half of the year, but summer saw a postponement of investment and recruitment decisions. Confidence loss slowed economic growth, easing inflationary pressures. In November and December, we thus lowered the interest rates to an all-time low. 3. Under normal circumstances, changing interest rates alone would have sufficed to influence prices and economic activity. Unfortunately, the crisis proved extensive  BIS central bankers’ speeches  1  enough to disrupt the functioning of the monetary policy transmission mechanism. The ability of commercial banks to issue loans to companies and households was thus significantly reduced. This compelled us to take various non-standard measures, starting from August. We supported the securities market in order to prevent paralysation of the activities of banks; we continued the unlimited provision of liquidity loans to banks; we offered banks three-year loans on highly favourable conditions; we expanded the list of eligible collaterals for liquidity loans, and lowered the minimum reserve requirement from 2% to 1% at the end of the year. 4. Looking back, it has to be admitted that the annual growth in consumer prices was faster than expected, amounting to 2.7%. Inflation picked up mostly due to the price growth of commodities. This is confirmed by core inflation remaining below 1.5%. Inflation expectations are also in line with our long-term goal. [THE PRICE OF CRISIS-TIME MONETARY POLICY FOR CENTRAL BANKS] 1. These bold and crucial steps came with a price – the risks inherent in the central banks’ balance sheets have increased.