policy strategy of the ecb : the playbook for monetary policy decisions ”, speech at the hertie school, berlin, 2 march. 5. the “ one - year forward real rate nine years ahead ” is the market ’ s judgement of the one - year real interest rate prevailing nine years from now. 6. the literature on the optimal size of the central bank balance sheet is limited. charles goodhart provided an initial discussion of this notion in goodhart, c. ( 2017 ), “ a central bank ’ s optimal balance sheet size? ”, discussion papers, no 12272, centre for economic policy research. as regards the ecb ’ s balance sheet, there is no established view about the desirable ( “ optimal ” ) size and composition in the long run. it is clear, however, that any attempt to determine an optimal size and composition would need to take stock of the evidence from the global financial crisis, the sovereign debt crisis and the covid - 19 crisis. moreover, balance sheet policies have been recognised as a key instrument in the ecb ’ s monetary policy toolbox, as reflected in the ecb ’ s monetary policy strategy statement. see also altavilla, c., lemke, w., linzert, t., tapking, j. and von landesberger, j. ( 2021 ), “ assessing the efficacy, efficiency and potential side effects of the ecb ’ s monetary policy instruments since 2014 ”, occasional paper series, no 278, ecb, september. 7. barbiero, f., boucinha, m. and burlon, l. ( 2021 ), “ tltro iii and bank lending conditions ”, economic bulletin, issue 6, ecb. 8. stock effects of asset purchases relate to the persistent changes in bond prices due to the ensuing variations in the ( risk - adjusted ) stock of bonds that private investors are expected to hold. notably, asset purchases lead to a compression in term premia via the extraction of duration risk from the market ( see altavilla, c. et al., op. cit. ). because markets are forward - looking, stock effects generally arise upon a policy announcement ( or in anticipation of the announcement ) and are influenced by the expected future evolution of central banks ’ asset holdings. empirical evidence suggests that stock effects account for the bulk of the impact of asset purchases and are likely to last longer ( although assessing their duration is

one that aims to cement the inflation path at the target. there are three important distinctions we need to make about normalisation. normal does not mean neutral first, normalisation is not the same thing as a neutral policy stance, which is when monetary policy is neither accommodative nor contractionary for the economy. a neutral stance allows the central bank to stabilise inflation around its target when output is at potential and when there are no transitory shocks disrupting the inflation path. but if we have a situation where there are shocks depressing the economic outlook, uncertainty is high and output is still below its potential level, cementing the inflation path at 2 % would require a gradual withdrawal of accommodation, so that the stimulus is reduced over time but does not suddenly disappear. normal does not mean theoretical second, the normalisation process should not be assessed against unobservable reference points, such as the natural ( or neutral ) rate of interest [ 3 ] and some optimal or “ normal ” size and composition of the central bank ’ s balance sheet in the long run. these concepts are only vague guideposts at the best of times, and they are particularly fraught with uncertainty in the current environment. before the pandemic, the real natural rate of interest for the euro area was estimated to range from just over 0 % to less than - 2 %, depending on the model used. [ 4 ] in fact, proxies of real rates are already at the higher end of that range – for instance, the one - year forward real rate nine years ahead [ 5 ] recently increased significantly, reaching 0 %. but the natural rate of interest is particularly hard to estimate at the moment, not least because the pandemic has scrambled all the typical models used to calculate it. all we can say with confidence is that the natural rate of interest has declined significantly compared with the period before the global financial crisis and that estimates are imprecise and widely dispersed. as such, they cannot serve as an actual guide for policy. the picture is further clouded when it comes to the “ normal ” size and composition of the central bank ’ s balance sheet. it is unlikely that the prevailing size and composition prior to the global financial crisis are still valid benchmarks – we can surmise that the optimal balance sheet is different in size and composition today. but there has so far been little empirical work in this area [ 6 ], so it cannot serve as an actual guide for policy either.