. this is exactly what we believe has been happening in the developed world for quite some time now ( chart 2 ). here are some famous estimates made by john williams at the san francisco fed, but you can find similar estimates elsewhere. chart 2 : real equilibrium rates in the developed world have been falling steadily ( holston et al., 2016 ) why is that? nobody knows for sure. but i tend to explain it using a famous quote from the french poet paul valery – “ the future is not what it used to be ”. probably due to factors such as demography, we are tending to look differently at the future. we have a different “ discount factor ”, if you will, which is leading us on average to prefer future consumption to current consumption ( on average, of course, not individually ). this basically changes everything for monetary policy, which is a policy based on the relationship between real interest rates and demand. once central banks in the developed world hit the zero lower bound on nominal statutory interest rates, they tried – and have been trying ever since – to respond to this perceived or detected decline in the natural interest rate by doing other things, such as qe, forward guidance and exchange rate commitments. some have even tried negative nominal interest rates. 3 / 5 bis central bankers'speeches if this whole story is realistic, and central bankers tend to believe it is, what they did – or have been doing – is nothing other than keeping their economies in equilibrium by other means. this might have side - effects, of course, and there are trade - offs, but the main story is this. in broader terms, it is still a fight to keep the value of money stable, but this time around not by fighting inflation, but by combating the deflationary tendencies stemming from weak current demand, as demand is tending to move further and further into the future – which is just another way of expressing the decline in the equilibrium natural interest rate. let me make a small detour to the financial sector. many are arguing that low nominal interest rates are killing the financial sector and are calling for higher rates as soon as possible. but if this model is right, higher rates would not help either, as rates substantially above equilibrium would mean that demand for loans from banks would decline sharply and the riskiness of future projects would increase, and even currently viable projects might turn into unviable, nonperforming ones. but let ’ s go back. what is a real

they see ( often dimly ) as only prospective. reality eventually replaces hope, but the cost of delay is a more abrupt and disruptive adjustment than would have been required if action had been more pre - emptive. increased transparency for businesses, financial institutions, and governments is a key ingredient in fostering more discipline on private transactors and on government policymakers. increased transparency can counter political bias in part by exposing for all to see the risks to stability of current policies as they develop. under such conditions, failure to act would also be perceived as having political costs. i suspect that recent political foot dragging by governments in both developed and developing countries on the issue of greater transparency is credible evidence of its power and significance. transparency, which is so important to foster safe and sound lending practices, is, of course, less relevant for local currency lending if banks are guaranteed with sovereign credits. moreover, transparency becomes especially difficult to create for organizations and corporations with large interlocking ownerships. cross holdings of stock lead too often to lending on the basis of association, not economic value. the list of problems that must be addressed to achieve balance in our future global financial system could be significantly extended, but let me end with a notion that is relevant also to today ’ s crisis. it is becoming increasingly evident that supervision and regulation should address excess nonperforming loans expeditiously. the expected values of the losses on these loans are, of course, a subtraction from capital. but since these estimates are uncertain, they embody an additional risk premium that reduces the markets ’ best estimate of the size of effective equity capital even if capital is replenished. it is, hence, far better to remove these dubious assets and their associated risk premium from bank balance sheets, and dispose of them separately, preferably promptly. * * * as a consequence of the unwinding of market restrictions and regulations, and the rapid increase in technology, the international financial system has expanded at a pace far faster than either domestic gdp or cross - border trade. to reduce the risk of systemic crises in such an environment, an enhanced regime of market incentives, involving greater sensitivity to market signals, more information to make those signals more robust, and broader securities markets - coupled with better supervision - - is essential. obviously appropriate macro policies, as ever, are assumed. but attention to micro details is becoming increasingly pressing. nonetheless, it is reasonable to expect that despite endeavors at risk containment and prevention the system may fail