speech low inflation : macroeconomic risks and the monetary policy stance keynote speech by philip r. lane, member of the executive board of the ecb, at the financial markets workshop of the economic council ( finanzmarktklausur des wirtschaftsrats der cdu ) berlin, 11 february 2020 in the period between the end of the bretton woods system in the early 1970s and the global financial crisis in 2008, the main challenge for central banks was to tackle excessively - high inflation and guard against its resurgence by counteracting pro - inflationary shocks. more recently, anti - inflationary shocks have dominated and addressing excessively - low inflation poses new challenges. in my remarks today, i therefore plan to focus on the conduct of monetary policy when inflation is below target and explain why the ecb is maintaining an accommodative monetary policy stance. i will also discuss why it is necessary to adopt unconventional monetary policy measures when the conventional monetary policy instrument – the central bank ’ s policy rate – is constrained. macroeconomic risks of excessively - low inflation from a macroeconomic perspective, excessively - low inflation poses several dangers. one danger is that low inflation that persists over the longer term provides only a small buffer against deflation : if inflation is low, it only takes a relatively small shock to tip the economy into deflation. the macroeconomic implications of deflation are well known. first, the expectation of falling prices delays purchases and investment. second, the combination of falling output prices and downwardly rigid nominal wages damages the profitability of businesses and reduces the demand for labour. third, deflation means that the real burden of nominal debt increases over time, making debt repayments more difficult for households, firms and governments. however, even in the absence of pronounced risks of deflation, there are substantial macroeconomic costs to persistently undershooting the inflation objective. first, excessively - low inflation can hamper beneficial macroeconomic adjustments. the stickiness of wages that hampers their adjustment to the downside is deep - rooted and pervasive. as a result, an insufficiently positive inflation rate means that a negative area - wide shock is more likely to result in higher unemployment than a smooth adjustment in real wages. similarly, in the event of asymmetric shocks that have differential effects across member states, low inflation also makes it more difficult to facilitate competitiveness adjustments in a monetary union. finally, a sufficiently - positive inflation rate smooths the

##meier, m. and koby, y. ( 2018 ), “ the reversal interest rate ”, nber working paper series, no 25406, national bureau of economic research. [ 16 ] of course, the importance of non - deposit funding varies substantially across different types of banks. [ 17 ] in relation to the impact of negative interest rates on the bank lending channel of monetary policy, see altavilla, c., andreeva, d., boucinha, m. and holton, s. ( 2019 ), “ monetary policy, credit institutions and the bank lending channel in the euro area, ” occasional paper series, no 222, european central bank. european central bank directorate general communications sonnemannstrasse 20, 60314 frankfurt am main, germany tel. : + 49 69 1344 7455, e - mail : media @ ecb. europa. eu website : www. ecb. europa. eu reproduction is permitted provided that the source is acknowledged. media contacts copyright 2020, european central bank