I suspect that all of these factors play a role. What public policy can do to address this issue is to ensure that the economy operates closer to the frontier of what is achievable. For example, more efforts to improve job skills would prove beneficial—through retraining and apprentice programs, and better alignment of education and training with business needs. Also, encouraging small business start-ups would help—by removing barriers for entrepreneurs to establish new businesses, and by creating more start-up incubator programs. I also suspect that well-targeted infrastructure spending would be advantageous if it addresses logistical bottlenecks and enables people to commute to areas with good job opportunities. For example, in the New York City metropolitan region, mass transit is old, slow and crowded. As a New Jersey resident, I’m still waiting for that second set of rail tunnels into New York City that should have been built years ago. While higher productivity growth could support better living standards, the benefits for low- and middle-income households depend, in part, on how those gains are distributed between business and labor, and on how labor income is distributed across the workforce. Moreover, income distribution shouldn’t be viewed as a static concept. It is important that people are able to move upward in income through their careers, regardless of their starting point. Over the past several decades, three developments have been discouraging. First, the share of labor income relative to business income has fallen.

In the case of the Eurosystem, the ECB balance sheet accounted for 12% of euro area GDP before the crisis and now stands at approximately 40%, around € trillion. Supervisory policy, for its part, has had to face the challenge of macrofinancial instability in a context of highly interconnected markets at the global level. In this area, the response has been three-pronged. First, the strengthening of microprudential regulation, with the new Basel III Accord, which includes greater capital requirements and a stricter framework for systemically important financial institutions. Second, the development of a new instrument, macroprudential policy, which addresses systemic risk and the procyclical behaviour of the financial system as a whole. And, third, the greater international coordination of regulation, which is necessary given the reality of globalised financial markets. Notable in terms of coordination has been the creation of the Financial Stability Board and, in the case of the European Union, the activation of the Banking Union, beginning with the SSM and the Single Resolution Mechanism. The new monetary policy I shall now turn to the challenges central banks face. The first is, evidently, identifying what is understood by the “new normal”. One question on which economic policy discussions are focusing is whether the advanced economies are in a new situation of secular stagnation, a “new normal” characterised by low growth, low inflation and low interest rates. We are seeing how, despite lower unemployment rates and the closing of the gap between potential and real output, inflation rates remain persistently low.