accumulation and is inimical to the adjustment necessary to unwind the excesses of the pre - crisis period ( see rajan, 2013, for a lucid exposition of this view ). the distinction here is between policies that are designed to bolster deficient aggregate demand and those that facilitate the necessary reduction in indebtedness and unwinding of the misdirected investments – most obviously in housing and construction – made before the crisis. the latter requires balance sheet repair of households and banks, including the writing down of debts that cannot be plausibly repaid and the closure of unviable businesses. that in turn allows resources to be reallocated to where they can be used more productively. now there is some validity to this critique. bolstering aggregate demand through sustained low interest rates and quantitative and credit easing will indeed tend to work against the desired rebalancing of demand away from consumption towards saving and net exports – this is what the previous governor of the bank of england christened the “ paradox of policy ” ( see king, 2009 ). and the present period of low interest rates may indeed allow some businesses to survive that do not have a viable long - term future. bis central bankers ’ speeches but against that, it is easier for households, businesses and banks to repair balance sheets when demand is strong than when it is weak. a sustained period of weak demand may also push many businesses that are perfectly viable in the long run into insolvency, especially if the supply of credit is impaired. and a long period with underutilised resources may cause durable damage to the supply capacity of the economy through a variety of hysteretic mechanisms, such as skill atrophy on the part of the unemployed and foregone opportunities for learning by doing. in any case, to me this sets up a false dichotomy. there are both keynesian and hayekian dimensions to the post - crisis environment. a “ two - handed ” approach is called for, in which supportive aggregate demand policies on the one hand are complemented by policies that facilitate the necessary restructuring, particularly of the banking sector, on the other. so rigorous evaluation of the assets on banks ’ balance sheets, followed by recapitalisation, should be the order of the day ( see tucker, 2013, for a similar perspective ). the united states has been a model in this regard. in europe, we have lagged a little, but are now

catching up. in the united kingdom, the prudential regulation authority, at the instigation of the bank ’ s financial policy committee, has required several of our major banks to strengthen their capital buffers against potential losses. and, in the euro area, the european central bank is about to undertake an in - depth health check of banks ’ balance sheets. of course, there are some risks attached to pursuing such accommodative monetary policies. quantitative easing can threaten future financial stability if it leads investors into excessively leveraged positions in the search for higher yields. moreover, a long period of low interest rates can lead people to overestimate the debt they can safely manage if interest rates were to normalise. central banks must be alive to these risks and deploy appropriate prudential tools in mitigation. furthermore, if central banks do seek to sustain demand, it can dull the incentives for private agents and governments to undertake the necessary adjustments and reforms. such moral hazard has surfaced from time to time in the euro area during the past couple of years. accommodative monetary policy can buy time, but it is a policy best suited to filling in a temporary hiatus in demand, not a long - lived shortfall : it is a bridge, not a pier. let me turn now to the international consequences of these unconventional monetary policies. there are several interrelated channels of propagation. first and most contentiously, they may put downward pressure on the exchange rate, a purely “ beggar - myneighbour ” channel. it was that which prompted guido mantega, the brazilian finance minister, to charge advanced economy central banks with engaging in a “ currency war ”. central banks in other countries may then respond by setting lower policy rates in order to lessen the appreciation of their currencies. one way to see whether this has happened is to look at the departures from what a standard taylor rule would imply ; the evidence surveyed by he and mccauley ( 2013 ) suggests that asian central banks have indeed shaded down their policy rates in response to looser us policies. further down the yield curve, large - scale asset purchases will reduce yields not only in the markets where the purchases are made, but also in the markets for substitute assets through portfolio balance effects. there are several papers that find the lower bond yields from the large - scale asset purchases of the major central banks have translated into lower yields in other local currency bond markets that are integrated into global