question cannot be avoided for three reasons. first, over the past 30 years, long - term real interest rates worldwide have been steadily declining. if low equilibrium rates are a permanent phenomenon, which is rooted in structural shifts in the world economy, then current difficulties and challenges will persist. the chances that we will sooner or later hit the zlb again are non - negligible. some observers make the point that, if we look at historical frequencies of cycles and recessions, it is much more likely than not that interest rates may need to return to zero at some point in the future. “ nonconventional policies ” may then become part of central banks ’ standard toolkit, rather than a unique exception. second, one legacy of the crisis will be the size of central banks ’ balance sheets. a central bank ’ s balance sheet is the foundation on which it conducts its policies, through its monopoly to create base money. an expanded balance sheet can be seen in two ways. either as a problem because the central bank leaves too big a “ footprint ” on money and financial markets ; and this could impair their normal functioning. also, by holding and actively managing a portfolio of public debt, central banks take quasi - fiscal responsibilities that must be avoided. alternatively the current situation may be seen as an opportunity, at least in times of crisis. central banks can use their expanded balance sheet to develop a richer set of tools and better address the challenges they are facing. finally, the pre - crisis, inflation - targeting regime, was closely associated with the “ great moderation ” when inflation was low and output growth stable. this period of sustained growth and limited volatility was considered normal at the time. we know now that it was very exceptional from a historical perspective. in the future, it is likely that monetary and financial stability policies will be periodically confronted with some kinds of abrupt, discontinuous shocks for which appropriate responses will have to be devised. in the coming years, there will be no shortage of very difficult issues for you to debate at the periodic meetings in basel. one thing that makes me confident about the future is my experience at the bis and with my colleagues, many of whom i am honoured to see in the audience today. looking back at my life, nowhere else have i met a group of leaders and officials who are so highly dedicated, so deeply sophisticated and professional, so devoted to acting together for the public good, so mutually respectful of each other. there is,

it has become increasingly apparent that all those risks are materialising in the euro area. finally, low equilibrium rates worsen the trade - off between price and financial stability. policy rates must be brought down for price stability to be preserved. however, long periods of low interest rates unavoidably create incentives for risk taking and “ search for yield ”. that dilemma can, in principle, be solved through proper macroprudential policies. i will return later to challenges we face in that specific area. the meaning of price stability let me start with a crucial point. central banks have a strong mandate to preserve and achieve price stability. strict adherence to this mandate – and the clear willingness to fulfil it – is their main protection against the dangers created by the zero lower bound. as we all know, inflation is ultimately driven by expectations. inflation expectations were remarkably stable during the whole first decade of the euro. today, the major risk in the euro area is a downward drift that would durably set long - run inflation expectations at a level below our objective of price stability. we do not know much about how expectations are formed. however, i have no doubt bis central bankers ’ speeches that the perceived reaction function of the central bank plays a major role in anchoring price stability. second, symmetry is of the essence. for a significant period of time, we have been well below our definition of price stability in the euro area, both in terms of effective inflation and long - term expectations. there is a temptation to take a benign view of this situation and consider that low inflation is beneficial per se, irrespective of its level. in a similar vein, some forms of “ good ” deflation could be accepted as conducive to stronger growth. to me, this approach is very misleading. i will indulge here in a little bit of history. as you know, at the inception of the euro, the definition of price stability was set as “ lower than 2 % ”. that definition was quickly perceived by markets and economists as meaning we took a benign view of low inflation or, even, stood ready to accept deflation. as a result, the governing council felt the need, in 2003, to change the wording and specify the definition of price stability as “ lower but close to 2 % ”. third, the validity of the 2 % target is widely acknowledged. that definition of close to 2 % has today been broadly adopted in major advanced economies, including