observable, we can only estimate it, like the output gap, for instance – monetary policy must take this variable into account and must in fact respect it. given the inflation outlook, the movements of nominal interest rates or policy rates should, in an ideal world, imitate those of the equilibrium rate. or at least they should not deviate much from equilibrium. why? because this interest rate interconnects the future, the present and the past. it puts all three into equilibrium, in terms of savings and investment, current and future labour employed, current and future preferred leisure, etc. if monetary policy does not in broad terms “ respect ” the evolution of the real interest rate, it can create imbalances one way or the other. if you go too high above the real interest rate and the actual real interest rate is above the natural one, you create recessions, unemployment, falling investment and declining asset prices. and if you go lower or substantially below the equilibrium interest rate, you create overheating, excessive debt and rapidly increasing asset prices. even more importantly, moving the statutory interest rate has fundamental effects on the financial sector. the financial sector is a time - transforming sector – every second, it transforms the present into the future ( short - term liabilities into long - term assets – typically done by banks ) or vice versa ( long - term liabilities into short - term assets – typically done by insurance or pension companies ). whenever you take the policy rate above the equilibrium interest rate, you create a problem out of what happened in the financial sector in the past. whenever you go substantially below, you create problems in the future. i have chosen non - performing loans as an example that is, i believe, quite easy to understand. if you substantially increase rates now, many projects from the past become unviable and non2 / 5 bis central bankers'speeches performing. if you go substantially below, many of the currently new projects will become unviable in the future when rates return to equilibrium. in other words, the financial sector as a time - transforming sector is especially sensitive to the movement of real rates and to discrepancies between the actual real rate and the natural rate. to make all this even more complicated, try to imagine that the equilibrium or natural real rate of interest is not constant, but is itself moving in one direction. then, as a central banker, you have to go down even more than you thought conceivable

mojmir hampl : monetary policy and the current macroeconomic environment in the developed world speech by mr mojmir hampl, vice governor of the czech national bank, at the deutsche bank prague client conference, prague, 25 october 2016. * * * ladies and gentlemen, good afternoon. thank you very much for inviting me again to your flagship event. it is my utmost pleasure to be here. actually, this is the third time in a row i have had the chance to speak here. in 2014 my topic was, quite expectedly, the exchange rate commitment and its introduction in november 2013. i recently looked at my slides from 2014, and i would not change anything about them. only the timing of the exit has changed – quite radically, i have to admit. the following year, 2015, the obvious topic was a comparison of the czech and swiss cases. this was especially interesting given the abrupt and completely surprising swiss exit from their exchange rate commitment in january 2015. i thought to myself : “ what would be a natural candidate for this year? ” i put my mind to work and suddenly a topic appeared : our own czech exit, our own way of abandoning the exchange rate commitment, which is almost three years old now. however, i somehow feel that the exit will be a key topic for your questions and comments. so, i eventually decided to speak about something else, something more abstract and may be a bit more general : the constraints on monetary policy in the developed world. as i see the czech republic a part of the developed world, i believe this is a topic that is relevant to the czech national bank. the key constraint or dilemma – or even puzzle, if you will – for us in the central banking community has been one key real variable which we believe is beyond the reach of central bankers. that variable is the real equilibrium, or natural, interest rate. we believe that this variable is absolutely key for the economy and that it is exogenous ( i. e. not in hands of anybody, or at least not central bankers ). at the same time, it critically influences both the financial sector and the real economy. i have tried to depict what i want to say on this very stylised chart ( chart 1 ). chart 1 : the role of the equilibrium interest rate 1 / 5 bis central bankers'speeches it basically shows that if you have got the natural real equilibrium interest rate at a certain level – and, of course, it is not directly