underwriting performance of euro area insurers. at the same time, the turmoil in the financial markets continues to weigh on insurers in their attempts to generate investment income. iii. overall assessment in conclusion, i will summarise our overall assessment of the risks to euro area financial stability. over the past six months, the deterioration in the macro - financial environment has continued to test the shock - absorption capacity of the euro area financial system. the profitability of euro area major banks has been eroded and the prospects for a significant turnaround in the short term are not promising. these prospects weighed on investor confidence in the resilience of already - weakened financial institutions. importantly, however, capital buffers have been rebuilt through mitigating actions taken by the major banks themselves, as well as through the injection of capital by governments, and the securities prices of these institutions have responded positively. because capital buffers have been maintained well above the minimum regulatory requirements, overall euro area lcbgs appear to be sufficiently well capitalised to withstand severe but plausible downside scenarios. the main risks identified within the euro area financial system include the possibility of : • a further erosion of capital bases and a renewed loss of confidence in the financial condition of lcbgs ; • significant balance sheet strains emerging among insurers ; and • more widespread asset price declines coupled with high volatility. outside the euro area financial system, important risks include the possibility of : • us house prices falling further than currently expected ; • an even more severe than currently projected economic downturn in the euro area ; and • an intensification of the stresses already endured by central and eastern european countries. it cannot be excluded that many of these risks could materialise simultaneously. indeed, this could happen if the global economic downturn proves to be deeper and more prolonged than currently expected. all in all, notwithstanding the measures that have been taken by the eurosystem and governments to stabilise the euro area financial system and in spite of the recent recovery in the equity prices of most major banks, policy - makers and market participants will have to be very alert in the period ahead. there is no room for complacency because the risks for financial stability remain high, also bearing in mind that the credit cycle had not yet reached a trough. banks, in particular, will therefore need to be especially careful in ensuring that they have sufficient capital and liquidity buffers to cushion the risks that lie ahead while providing an adequate flow

, the equilibrium real interest rate has some relation to long ‐ run productivity growth. so this touches on the so ‐ called “ secular stagnation ” hypothesis recently reinvigorated by gordon, krugman, summers and others. 28 indeed, there is evidence of declining productivity since the 70s. the issue is whether, and to what extent, the recent great recession and the resulting slow ∆ 0. 125 and ∗ 0. 125 and commit to max ∗, kiley and roberts ( 2017 ). see, for instance, blanchard, dell ’ ariccia and mauro ( 2010 ), and krugman ( 2014 ). constancio ( 2016 ). see gordon ( 2016 ) ; gordon ( 2012 ) ; krugman ( 2013 ) ; summers ( 2013 ) ; summers ( 2016 ). deleveraging process have exacerbated this trend, generating permanent costs from the crisis. this is a topic of heated debate at present, not only in the policy arena, but also in academic circles. 29 all in all, these arguments have merits, particularly for central banks with a dual mandate that includes output stabilisation, but they are too narrowly focused on the benefits associated with staying away from the elb. as going below the elb is not possible, fighting recessions and the resulting high unemployment rate becomes more difficult. increasing the inflation target real interest rates could then be effective to eliminate negative output and unemployment gaps. these benefits of a higher inflation target can be outweighed by the broader costs of higher inflation, depending on the chosen level. historically, relatively higher inflation has usually been associated with more volatile inflation. 30 moreover, the ecb and many other inflation ‐ targeting central banks have shown that other monetary policy tools are available when interest rates cannot be lowered further. against this background, the desirability of higher inflation targets becomes very controversial as economic theory could never specify with certainty the most desirable level within the range of low inflation values. since the 90s most central banks defined 2 % as the appropriate inflation objective, in some cases admitting temporary small deviations around that level. in the case of the ecb, the inflation objective is to maintain in the medium ‐ term a level below, but close to 2 %. should non ‐ standard monetary policy tools become standard? let me now turn to the monetary policy toolkit to be employed in order to achieve central bank targets. more specifically, should the size and composition of the central bank balance ‐ sheet be now