of very low rates may in itself call for tighter regulation. in particular, such an environment may increase the risk of unsustainable increases in asset prices. this may be the case if investors take on more risk to increase returns or if they become overly optimistic about further increases in asset prices, thereby fuelling an asset price bubble. this leaves an important role for appropriately designed macroprudential measures. inflation and monetary policy in addition to the decline in r *, very low policy rates in recent years also reflect that central banks have tried to stimulate aggregate demand in order to reach their inflation targets. in fact, inflation in many advanced economies has been subdued for an extended period of time as illustrated by the chart. chart 3 : extended period of subdued inflation following global financial crisis it is not the first time in history that real interest rates are negative across a number of advanced economies. but whereas earlier episodes of negative real rates have reflected temporary bouts of inflation, this time it has coincided with highly subdued price pressures in many countries. while the key priority of monetary policy used to be to avoid inflation running too high, many central banks are currently struggling to avoid a situation where inflation drifts too far below target and inflation expectations risk becoming de - anchored. to that end, low policy rates have been accompanied by a number of other measures such as quantitative easing and forward guidance. page 3 of 7 danmarks nationalbank sets policy rates with the sole objective of keeping the danish krone pegged to the euro. this means that we do not consider developments in equilibrium interest rates or inflation when making decisions on monetary policy. but the policy regime implies that our policy rates closely follow those of the ecb. so, in that sense the decline in our policy rates reflects the same factors that have driven down interest rates in the euro area. significant deviations between danish and euro area policy rates only occur in situations with considerable pressure in foreign exchange markets. in fact, the initial introduction of negative policy rates in 2012 reflected substantial capital inflows amid the european sovereign debt crisis. and the reduction of the policy rate to a record low of - 0. 75 per cent in early 2015 was necessitated by very strong capital inflows following the decision of the swiss national bank to discontinue the ceiling on the swiss franc and the subsequent announcement of a large scale asset purchase programme by the ecb. but despite very low danish monetary policy rates, subdued consumer price inflation means that real interest rates in denmark are not lower

rates reflect decline in equilibrium real rate of interest understanding the decline in r *. the decline in r * reflects that from a global perspective, desired savings have risen relative to desired investments. 1 but as we cannot interact with mars, realised investment must equal realised savings at the global level. this means that in equilibrium, interest rates have declined. changing demographics have been identified as a key factor behind the decline in r *. in particular, an ageing population is found to have been driving up desired savings, thereby pushing down equilibrium interest rates. moreover, the decline in productivity growth that has been observed in many advanced economies since the 1990s may have reduced the incentive for firms to invest in new equipment. at the same time, slower productivity growth and hence slower growth in earnings may have contributed to higher household savings rates. if a household expects its incomes to increase substantially it has less incentive to save for the future. from that logic, weaker growth in incomes will tend to increase savings, putting downward pressure on r *. the distribution of income and wealth across individuals is also a potential factor behind the decline in equilibrium interest rates. 2 in a number of countries, the distribution of wealth in particular has become more uneven. as the wealthiest part of the population typically has a lower pro - se e. g. claus brand, marcin bielecki and adrian penalver ( editors ), 2018, the natural rate of interest : estimates, drivers and challenges to monetary policy, ecb occasional paper no. 217, and the references therein. see e. g. larry summers, 2014, us economic prospects : secular stagnation, hysteresis, and the zero lower bound, business economics, vol 49 ( 2 ), national association for business economics. page 2 of 7 pensity to consume, this has contributed to an increase in global desired savings and hence a decline in r *. we observed a pronounced decline in estimates of r * in the immediate aftermath of the financial crisis. this is likely to reflect that the financial crisis led to a general reassessment of risks among firms and households in many countries, prompting them to deleverage. with a more cautious approach to savings and spending, r * must fall. this has been corroborated by stricter financial regulation that was implemented in response to the crisis. the link between financial regulation and interest rates goes two ways. while a more prudent approach to spending and savings may have reduced equilibrium interest rates, an extended period