central banks ’ monetary policy in regaining control of inflation and in establishing strong credibility. however, in mid - 2014 these benign developments were overshadowed by a decline in long - term inflation expectations, which, from a central bank ’ s perspective, was highly concerning4. turning to the real term premia, available since 2005 when inflation swaps were introduced in the euro area, we observe a significant decline, mainly on account of the imbalance between the reduced supply of, and the increased demand for, safe assets at the global level, which has been exacerbated by the global financial crisis. the final component is the expected average real rate. focusing on its value over the longer run, it is found to have steadily declined due to structural forces on the one hand and to cyclical factors on the other. structural factors include the slowdown in productivity, unfavourable demographic developments and the increase in savings. the intuition is that these factors drive investment, which in turn determines the demand for loanable funds. in the euro area and other major advanced economies, productivity and population growth, which are also the drivers of potential gdp growth, have been declining for decades. the intersection point of the desired demand for “ loanable funds ” with the level of savings constitutes the interest rate. in addition to these secular forces, more cyclical factors linked to the financial crisis have been a 3 / 7 bis central bankers'speeches drag on real interest rates. in particular, the euro area has faced a massive debt overhang in the public and private sector, resulting in a severe “ balance sheet recession ” and a tightening of credit conditions. this has required a substantial amount of deleveraging, which in turn reduced investment, prolonged the downturn and weighed on the real interest rate. overall, the pre - crisis slowdown in potential growth, coupled with the negative effects of the crisis on investment and private sector balance sheets, has resulted in an imbalance between saving and investment, and largely accounts for the decline in the real interest rate to very low levels. from a monetary policy perspective, this means that the equilibrium real interest rate – defined as the value of the short - term real interest rate consistent with the economy operating at its potential ( or sustainable ) level and inflation at its objective – has declined. 5 faced with disinflationary shocks, a central bank wishing to preserve price stability when the equilibrium real rate has declined has to steer interest rates to levels below the equilibrium real rate prevailing in the long

all asset portfolios at every moment. that would not be the case if all financial markets would obey to the canons of perfect competition, would process information with full efficiency and would not be subject to overshooting, herd behaviour and price misalignments during significant periods of time. as this does not correspond to the real world, full fair value tends to create what has been dubbed as “ artificial volatility ” in a company ’ s earnings, particularly in the case of financial institutions. when profits are artificially inflated, this may lead to higher dividends and bonuses based on the recognition of unrealised gains. the undesirable side effect of such payments would be an effective depletion of capital ; a capital cushion that might be needed at a later stage when the markets correct. in some cases fair value accounting may provide information that is in my view outright wrong even for investors. consider the recent example of a swiss bank. the bank ’ s recently published first quarter results was only sfr 44m bis central bankers ’ speeches because the bank had to recognise losses in the range of sfr 1. 5 bn from an improvement in its own creditworthiness that raised the value of its own debt securities. presumably the opposite occurred in some previous year, meaning recognition of profits, when it may have suffered a decrease in its rating. it is doubtful that this, in my view, distorted information provides the right incentives for proper risk management and can indeed be considered to be “ useful ”, which is a stated objective that accounting should meet in line with the iasb ’ s conceptual framework. from a financial stability perspective, the impact of “ short - termism ” and volatility of accounting information can be very detrimental as both may aggravate pro - cyclicality. this means more severe downturns and more acute building up of risks, resulting in a misallocation of resources that lead to an overall welfare loss for society. this is also consistent with the findings of a recent paper by the federal reserve bank of boston1 which also concluded that implementing fair value accounting more broadly may not necessarily provide financial statement users with more transparent and useful reporting. additionally, it stressed that financial stability may be negatively impacted by fair value accounting due to the interconnectedness of financial institutions, markets and the broader economy. the second example where accounting seems to have an impact on market dynamics and cyclicality within the financial system is the provisioning or impairment methodology the main criticism of the “ incurred