peter praet : long - run saving and monetary policy speech by mr peter praet, member of the executive board of the european central bank, at the parliamentary evening on " challenges for long term savings products in the context of the zerointerest rate policy ", brussels, 14 november 2016. * * * accompanying slides the european central bank ( ecb ) has carried out a number of unconventional monetary policy measures since the crisis to bring about a return of inflation to our objective. these measures include targeted long - term repos, negative deposit facility rates since 2014 and large - scale asset purchases. we have received criticism of these unconventional policies from some quarters surrounding their potential negative consequences. in the light of that criticism, i wanted to answer three crucial questions tonight relating to our unconventional measures : why have we implemented them? have they been successful in their aims? and, finally, have they had unduly large negative side effects on the distribution of wealth and income? the determination of long - run interest rates first of all, i would like to spend a few moments discussing the determination of interest rates and what has happened to long - run interest rates over the past three decades. these two things have significant bearing on the rest of my remarks. put most simply, saving is the decision to forgo consumption today, in return for higher consumption in the future. since people are by nature impatient, they require compensation for delaying consumption, compensation usually in the form of interest payments. that compensation is paid for by those seeking to spend more today than their current income, such as people buying houses, or firms investing in new capital, who in return will not consume all their income in the future to repay the debt. there are two parts to interest payments – the real component which is the extra amount of goods and services you can buy in the future relative to today and the inflation component which compensates for the changes in the prices of goods and services in the future. long - run nominal interest rates have been falling across major advanced economies for more than three decades. in major part, this is due to the success of central banks in taming inflation. the expected inflation rate and the inflation risk premium incorporated into long - run interest rates have fallen. yet changes in expected future inflation that are in turn realised are benign for savers – it is changes to the amount of goods and services that can be purchased in the future that matter, not changes in nominal prices. but it is not just long -

the supply side pushes one further to the right of the schematic picture in chart 8. chart 8 : lags in the inflation process mean that, when the policymaker is uncertain about supply, there ’ s a trade - off between a better understanding of the economy and the timeliness of the policy response the lag between movements in spare capacity and inflation is longer and the price one pays for this extra information, in time, is therefore higher. there are clearly risks in moving only when you see “ the whites of inflation ’ s eyes ”. but it may still be a price worth paying. the two graphs below ( chart 9 ), derived from a simple model of inflation in which there ’ s incomplete information about the shocks hitting the economy [ 7 ], help to cement the point. in this representation inflation can be moved around by four underlying drivers – demand, productivity, firms ’ mark - ups and movements in the nairu – but the policymaker has only three observable variables from which to deduce them ( output, unemployment and inflation itself ). importantly, he or she is assumed to understand how variable these underlying disturbances are ( estimates that can be built up over time ). but there is nonetheless what is sometimes called a “ signal extraction ” problem, and one can estimate only imprecisely, in real time, what is driving what. and, in doing so, the policymaker will lean on a greater range of information. chart 9 : more weight put on unemployment when there ’ s uncertainty about underlying productivity growth ; uncertainty about the nairu means wage and price inflation matter too sources : ons and bank calculations. first panel plots the contribution of activity and unemployment data to the estimated variance of the output gap, where along the x - axis we increase the standard deviation of the supply shock relative to the others. second panel charts the contributions of unemployment and inflation to the estimated variance of the output gap, where along the x - axis we increase the standard deviation of the shock to u *. the graphs plot two pairwise comparisons of the relative importance of the observable series for estimates of the output gap, depending on the variance of ( and therefore uncertainty about ) the underlying shocks. as uncertainty about underlying productivity growth rises, the policymaker puts increasing weight on developments in unemployment rather than gdp growth. when the nairu is more uncertain, inflation becomes more significant. as that happens, the variability of inflation itself rises, because policy has a less precise understanding