destruction which contributes to fostering productivity growth. the adverse consequences on the japanese real economy are well documented in the literature. 4 the normal process of industrial churning was severely disrupted in sectors populated by “ zombie firms ”. under normal conditions, unprofitable enterprises would have lost market value or been driven out of the market, paving the way for profitable new entrants. by guaranteeing the liabilities of banks that supported such zombies, the government effectively kept wages high and prices low, reducing the profits that new productive firms generated and distorting market competition. as a result, even solvent banks had very few good lending opportunities and the economy remained stagnant throughout the 1990s. the risks of a lost decade in the euro area how likely is a full - blown japan - style scenario in the euro area? peek, j. and rosengren, e. ( 2005 ), “ unnatural selection : perverse incentives and the misallocation of credit in japan ”, american economic review, vol. 95, pp. 1144 – 1166. caballero, r., hoshi, t. and kashyap, a. ( 2008 ), “ zombie lending and depressed restructuring in japan ”, american economic review, vol. 98, pp. 1943 – 1977. bis central bankers ’ speeches many underlying conditions in the economic situation in japan in the 1990s and in europe today clearly differ. let me mention four of them. first, at the aggregate level, balance sheet problems are less obvious for the euro area in contrast to 1990 ’ s japan, which faced severe adjustment needs in the corporate sector. for example, the ratio of the debt of non - financial corporations relative to gdp declined from 130 % to just 80 % in the 15 years that followed the peak in economic activity in the case of japan. for the euro area, the corresponding ratio has hovered around much lower levels of 75 – 80 % since 2007. the indebtedness of euro area households is also lower compared with that of japanese households. the second key difference between the two episodes is that the adjustment of asset prices was more subdued in the euro area as a whole. four years after the peak in residential property prices in the euro area in 2008, the cumulative decline at the aggregate level has been around 3 %. euro area equity prices have also rebounded from their post - lehman trough. this contrasts with the larger pre - crisis bubble in japan, which was deflated by the collapse of equity prices persist

which were financed with short - term capital inflows in the form of bank deposits and treasury bills and bonds. the united states was, therefore, acting as “ banker of the world ”, and the accumulation of u. s. net long - term foreign assets was reassuring foreign investors ( eichengreen 2011 ). however, assuming that capital flow restrictions and underdeveloped financial markets elsewhere in the world would have persisted, the country would likely have soon reached a limit in its ability to engage in maturity transformation in the capital account. triffin ’ s prediction that the core country would have had to eventually run increasing current account deficits to allow for world trade expansion was, therefore, basically right under the bw rules. official liquidity can be defined as the amount of funds that is unconditionally available to settle claims through monetary authorities, mainly consisting of central bank money in reserve currencies and foreign exchange reserves. see, for example, caballero 2009 and caballero and krishnamurthy 2009. bis central bankers ’ speeches three core drivers of reserve accumulation can be identified, in particular : 1. a few surplus emes buy dollars as a by - product of a strategy aiming to systematically keep their real effective exchange rate undervalued ; 2. other emes with largely open capital accounts, which are exposed to capital flow volatility, purchase dollars to build up precautionary reserves in the event of a reversal of capital inflows ; 3. the commodity exporters recycle their current account surpluses into safe dollardenominated assets. as in triffin ’ s day, however, this cuts both ways. the demand for safe assets feeds that exorbitant privilege enjoyed by the united states. this contributes to a weakening of us policy discipline as the country tends to excessively rely on easy credit in normal times and very expansionary macroeconomic policies in times of crisis. the outcome is excessive us indebtedness. the corporate sector was in debt prior to the burst of the dot - com bubble in 2001 ; so were the household and financial sectors before the eruption of the sub - prime crisis in 2007 – 08 ; and the official sector is in debt today. this leads me to the second valid element of the triffin dilemma. the ims is not in a better situation today. the quandary under the bw system – the lack of a credible anchor for international monetary and financial stability – continues to exist.