to 2 percent on a stable basis. ” but in doing that, a central bank like the ecb would face another major challenge. eventually, these policies will run into economic, institutional and legal restrictions. certain economic restrictions, like the difficulties associated with lowering interest rates far into negative territory, have become more relevant as a consequence of a falling natural rate. 6 the scope for central banks to fight recessions by lowering short - term policy rates has likely gotten structurally smaller. while non - standard monetary policy measures can be used to ease policy further when policy rates have reached their effective lower bound, these too will eventually run into economic restrictions, when increasing side - effects start to outweigh the diminishing marginal returns of further easing. these restrictions are not unique to the ecb, and they challenge the notion that also persistently low inflation “ is always and everywhere a monetary phenomenon ”. 7 other, institutional and legal restrictions are more specific to the emu. the ecb operates in an as of yet not fully complete monetary union and faces a large number of heterogeneous fiscal counterparts. it is also bound by a treaty that explicitly prohibits it from engaging in monetary financing, the interpretation of which has been subject of debate and even litigation. the ecb, however, has stood up to the challenge. supported by the significant strengthening of emu and reduced legal ambiguity around the ecb ’ s freedom to act, the ecb has substantially widened its toolkit. both in terms of instruments to ease the stance of monetary policy beyond the elb, and instruments to restore impairments in the transmission mechanism of monetary policy. this has contributed to a strong recovery of the euro area economy ( figure 3 ). from 2013 until 2018, growth has steadily exceeded potential, closing the output gap in the process. while it is challenging to put a number on the ecb ’ s contribution, ecb staff analysis suggests that the monetary easing since 2014 has cumulatively contributed almost 2 % to gdp. 8 6 for an overview of the debate on the changing natural rate of interest and its determinants, see bonam, d., van els, p., van den end, j. w., de haan, l. and i. hindrayanto ( 2018 ). the natural rate of interest from a monetary and financial perspective. dnb occasional study no. 3, june. 7 milton friedman ’ s much quoted proposition can be found in friedman, m. ( 1963 )

is both messy and costly. a difference to previous crises is the new financial products that have turned sour. it will be difficult to deal with these opaque and complicated new breeds of lemon. however, this does not make it less important to get the lemons – rather the contrary. there are also no shortcuts in dealing with bad assets. the losses must be recognised. a loss is a loss. the costs involved may make it tempting to sugar - coat the lemons by letting the bad assets be valued above market value, but this will only postpone the recovery. one possible approach to dealing with bad assets is through various forms of asset relief measures. however, if asset relief is offered, then the pricing must be set at conservative market values. a transfer value set above the market value is basically a transfer of money from taxpayers to bank - owners. this could also be costly over time, in terms of increased moral hazard. in addition, pricing above market prices may destroy the asset market for years to come and thus add to the costs of the crisis. to restart a market, it is crucial that investors become confident that the bottom has been reached. this confidence can only be achieved by the realistic and transparent valuation of assets. once at the bottom, people will start to listen to good stories about the future again. risk appetite will return and market activity will pick up. in my view, a key part of the successful resolution of the swedish banking crisis in the 1990s was that the impaired assets were assigned realistic and conservative values. removing the suspicion that bad surprises may linger around the corner is essential to restarting a market. it is a matter of confidence. similarly, the lack of confidence in the banks ’ balance sheets cannot be improved by creating opaque accounting rules. the book value of a bank will increase if we assign book values above market value, but will it restore confidence? again, to regain confidence, the balance sheets of banks should reflect realistic values. accounting rules should force banks to disclose what their assets are worth and not allow problems to be hidden. lack of confidence arises over concerns about a bank ’ s actual financial situation. if market participants have to recalculate reported valuations, then the return of confidence will be more difficult to achieve. it is therefore important that accounting is transparent and internationally harmonised. we should also keep in mind that accounting rules are not only about preserving financial stability in the short run. changing the accounting rules could make communication more uncertain and less transparent.