olli rehn : on conventional and unconventional monetary policies opening remarks by mr olli rehn, governor of the bank of finland, at the 70th economic policy panel meeting at the bank of finland, helsinki, 10 october 2019. * * * ladies and gentlemen, dear colleagues and friends, it is my great honour and pleasure to welcome you to the 70th economic policy panel meeting. economic policy – the journal, that is – has had an invaluable impact on economists and policymakers in europe since its establishment by georges de menil, richard portes, david begg and charles wyplosz in 1985. so many thanks to the current managing editors ( thorsten beck, andrea ichino, beata javorcik and tommaso monacelli ) as well as senior editors ( pierre cahuc, kevin hjortshøj and klaus schmidt ) for continuing this great tradition. for a frequent reader of economic policy like myself it is indeed a great pleasure and honour to open this panel. in my opening remarks i would like to maintain that the current global economic situation calls for interaction between different policy areas. many of the challenges that we are facing are beyond the mandates of central banks and should be addressed through fiscal and structural policies. better policy coordination – or policy mix – is key for better economic outcomes, especially since the monetary policy space is limited. in the euro area, growth has decelerated to about 1 % and is not forecast to meaningfully pick up in the immediate years ahead. although a recession has been so far avoided, the balance of risks is tilted to the downside. there is a long list of short - and long - term factors that contribute to this weak economic outlook, like the expanding trade wars and a possible hard brexit, as well as vulnerabilities in the emerging markets and geopolitical turbulences in the middle east. europe faces its own structural problems, such as population ageing, declining productivity growth, as well as populism and indebtedness. last but not least, there is the overwhelming challenge of mitigation of and adjustment to global warming. similarly, inflation in the euro area has continued to fall short with respect to the ecb ’ s target, and the inflation outlook is projected to remain subdued well into the future. in response to that, the governing council of the ecb substantially increased monetary accommodation at its meeting on september 12th. with this decision, financing conditions will remain

the natural level of real interest rates. a good example is the ageing of the societies with persistently declining shares of youngest cohorts. moreover, there are frictions in education and labour mobility that can further diminish the productivity potential of younger generations. all these factors lower aggregate investment and demand for capital. if they don ’ t reduce aggregate income and savings at the same time, they can ultimately lower the natural rate of interest. why do these mechanisms matter for monetary policy? because the lower the natural interestrate level is, the higher is the probability that nominal interest rates are near the effective lower bound – “ hitting the floor ”, if you like. a prolonged period of zero interest rates combined with low inflation could in turn trap the economy in a profoundly harmful equilibrium, which would undermine the effectiveness of monetary policy, constrain economic growth below its potential and hinder efforts to boost employment. let me be clear. we all, i assume, would like to get rid of negative interest rates. however, as long as the synchronized slowdown continues, there is no economically meaningful alternative to unconventional monetary policies – and it is better to be safe than sorry before shifting the policy gear back to normalization. at the same time, all countries and jurisdictions would do well by applying effective macroprudential policies to counter any negative side effects of accommodative monetary policy. furthermore, there are also new uncertainties and possibly fundamental changes in the functioning of the economy. low interest rates, low inflation and persistently low growth put our economic theories and past empirical relationships into a real test. facing these challenges, many central banks, including the federal reserve and the bank of canada, are currently reviewing their monetary policy strategies. the bank of finland has been making the case for a strategy review for the ecb. central banks in the european system of central banks have also invested in active research departments to analyse the implications of the new economic environment and new policy instruments, both for the conduct of monetary policy and its modelling. a strategy review referred to by christine lagarde would provide us with an opportunity to conduct a thorough scientific assessment of our monetary policy framework and evaluate its effectiveness in light of the new economic landscape and new monetary policy instruments. fiscal policies remain more fragmented, uncoordinated and reacting at a much slower pace. 2 / 3 bis central bankers'speeches this is especially the case in the euro area, which consists of 19 member states, all having separate fiscal and