, and the impact of monetary policy on investment and consumption is blunted by high private debt. the positive impact of higher demand on jobs is constrained by the partially structural nature of unemployment, such as the skill mismatch between job seekers and vacancies, low mobility of workers and the priority given to insiders. moreover, it is also constrained by capital market fragmentation, i. e. the inability to channel savings where investment is needed to create jobs. and absent other policies, stimulating demand may in fact only delay the necessary restructuring of the economy towards higher productivity sectors. this is where supply - side policies – by which i mean structural reforms – can help empower demand. by raising potential growth and hence future income, structural reforms create more space for governments, firms and households to spend today. by reactivating and reskilling the workforce, they allow employment respond faster to that higher demand. and by helping the economy to restructure, they ensure that higher demand is channelled towards the right sectors, and thus accelerates rather than retards the creative destruction process. the seminal paper on this issue began is blanchard, o., and l. summers ( 1986 ), “ hysteresis and the european unemployment problem ”, nber macroeconomics annual 1986, volume 1. for more details see speech by draghi, m. ( 2014 ), “ unemployment in the euro area ”, annual central bank symposium in jackson hole, 22 august 2014. for details on pre - crisis productivity developments see european commission ( 2013 ), “ catching - up processes in the euro area ”, in quarterly report on the euro area, vol. 12, issue 1, march 2013. bis central bankers ’ speeches what type of supply? this relationship between supply and demand, however, rests on the assumption that structural reforms will have mainly positive short - term effects. but this needs some more qualification. though the long - term benefits of structural reforms are by and large undisputed6, there are different views about the short - term effects in the academic literature. reforms can be shown to produce two, opposing sets of forces in the short - term. one is contractionary, as reforms lead to lower prices and higher real interest rates. if monetary policy is at the zero lower bound and unable to respond and fiscal space has been exhausted, higher real rates cause the private sector to postpone consumption and investment decisions and gdp to contract. 7 the other set of forces is expansionary. as

1939 concept of “ secular stagnation ” with interest rates staying permanently at lower levels and economic activity remaining subdued. there are many such examples. for instance, our imperfect understanding of the current slope of the phillips curve and the trends in productivity is one of the reasons why the ecb has been reluctant to complement its forward guidance with numerical triggers. i do not share this pessimism but i think it is of great importance to understand to what extent this development is driven by long - term forces, such as demographic changes or lower potential growth, and to what extent it is driven by medium - term forces, such as changes in risk aversion and the perceptions of macroeconomic risks in the wake of the recent crisis. frictions and rationality institutional details and frictions, both on the side of market participants and regulatory institutions, have an impact which is difficult to detect in normal periods. interbank markets, for instance, used to be seen by academics as a somewhat dull topic before the crisis, so that little was known about their functioning. both in europe and in the united states, they have been at the centre of recent policy debates, generating a welcome crop of new research, to which mars has been contributing. the dominant “ rational expectations ” modelling paradigm in economic research postulates strong assumptions about human decision - making, implying, for instance, that economic agents are always able to assign sensible probabilities to alternative outcomes. clearly, this characterisation of human decision - making stands in stark contrast to our own recent experience. we need to understand how panics and bubbles can emerge from psychological biases. the nobel prize co - awarded to robert shiller last year will certainly encourage more research in this direction. while much progress has been made on studying notions such as knightian uncertainty, sentiment, confidence or sunspots, more work is probably needed before they can be part of our standard modelling toolbox. a challenge is of course to come up with tested and robust behavioural theories. another important departure from rationality that is of key practical concern is how simple behavioural rules adopted by market participants in normal times can lead to entirely different outcomes or even to market meltdowns in crisis periods. agent - based models are a promising way to look at these problems, but they need to be developed in close cooperation with practitioners and policy - makers to take the proper behavioural rules as inputs. on both issues, what policy - makers need above all is more work integrating these approaches into richer