vitor constancio : interview in borsen - zeitung interview with mr vitor constancio, vice - president of the european central bank, in borsen - zeitung, conducted by mr mark schrors and published on 31 december 2015. * * * mr constancio, when you became vice - president of the european central bank ( ecb ) in 2010, could you have imagined that one day the ecb would be using all available means to drive up the rate of inflation instead of trying to curb rising prices? that would never really have occurred to me at that time. it was completely unexpected for everyone. however, it is not just an issue for the euro area. inflation is currently very low worldwide. many people, particularly in germany, consider it crazy that a central bank like the ecb is trying to create inflation in any way it can. as the ecb, we have a clear mandate and a clear target. the mandate is price stability, which we defined in 2003 as an inflation rate below, but close to, 2 % over the medium term. we do not want inflation to be too high, above our target. but we also do not want it to be too low. that is our maxim, and that is why we are doing what we are doing. nevertheless, many people are asking themselves what is so bad about an inflation rate of around 0 %, whether that doesn ’ t actually mean stable prices. you could, of course, question whether price stability does not mean 0 % inflation. at first glance, that would appear to be a good thing for people. but you should also ask yourself why almost all major central banks have an inflation target of around 2 %. there must be good reasons – and indeed there are. and what are they? first, measuring inflation accurately is difficult and both experience and the literature show that inflation numbers have a tendency to be higher than inflation actually is. when statisticians say that inflation is 0 %, it is highly probable that it is in fact below 0 %. that could lead to a potentially very dangerous situation. in addition, when inflation goes down, real interest rates rise. you mean nominal interest rates adjusted for inflation or expected inflation. in view of the decline in potential growth and productivity in the developed economies, it is estimated that the “ real equilibrium interest rate ”, which provides full employment without creating inflation, is currently negative in the united states and probably also in the euro area

, establishing regional development funds and for dispute resolution should be created. • communication and transport infrastructure between the bordering countries should be improved and upgraded to facilitate increased trade and factor mobility. • legal regulations for investor protection, intellectual property rights enforcement, anti - trust law, commercial law, labor relations, financial institutions should be harmonized. • financial markets should be widened and regulatory changes introduced to promote crossborder investment, listings, syndication, bond issues etc. after laying out the entire edifice of the preparatory measures required i will attempt to lay out an analytical framework for financial sector and banking sector harmonization in south asia and then apply this framework to the case of pakistan. empirical evidence and theoretical literature have now conclusively demonstrated that the more efficiently the financial sector carries out its intermediation role, the greater will be the volume of investment. more efficient financial intermediation also increases the average productivity of investment. two major determinants of this functional efficiency of financial sector are market structure and the regulatory framework. market structure consists of the degree of competition, concentration and interlocking control between financial institutions and business enterprises as well as the degree of specialization within the financial sector. it is influenced by the internal organization and management of the financial intermediaries. these, in turn, are affected by the degree of government ownership and control. the regulatory framework includes regulations imposed both for monetary policy as well as prudential purposes. steps taken to stimulate competition are lowering the barriers to entry, abolishing interest rate ceilings, removing directed credit allocation, and privatizing government owned banks. the privatization of government owned banks is still controversial in most of the region but it must be obvious by now that these banks suffer from three terminal diseases i. e. high volume of non - performing loans, high intermediation costs and loss of initiative and entrepreneurship. • thus harmonization of the banking sector in the south asian countries should be driven by these two considerations i. e. to eliminate the distortions in the market structure and to strengthen the regulatory framework prevailing in each country. this agenda for market structure improvement should therefore aim to achieve the following outcomes : • freeing interest rates so that they are determined by market forces abolishing or lowering reserve and liquidity requirements. • removing directed credit regulations and reservation of certain sectors as preferred ones. • adopting indirect instruments of monetary control instead of credit ceilings. • liberal branch opening and closure policy. • opening up or easing entry into the financial sector including privatization of state