the effective lower bound, and for a given level of inflation, there is a limit to the scope for expansionary monetary policy. the lower the natural rate, the less room there is for the central bank to provide monetary stimulus. on the other hand, a higher natural rate increases the scope for monetary policy to be expansionary. if we bring inflation back into the story, then higher inflation would also increase the yellow area in the figure, as it would push the ‘ real effective lower bound ’ more to the left. remember, the absolute lower bound is on nominal rates ; higher inflation therefore lowers the lower bound on real interest rates and in doing so creates more space for monetary stimulus. the effective lower bound is like the black hole of monetary policy. we cannot directly observe it. but we know that monetary space disappears if the natural rate approaches the lower bound. because that is the point beyond which the central bank ’ s interest rate cannot reach. so a low natural rate of interest is a challenge for central banks. and that is exactly what has happened. [ figure 3 ] figure 3. the natural rate of interest in the euro area has declined as you can see in this chart, empirical evidence suggests that the natural interest rate has been on a downward trend in the past few decades, both in europe and other parts of the world. estimates for the euro area put the current natural rate at, or even below, 0 %. several structural forces underlie this so - called secular decline in r *. think of ageing, rising inequality, higher risk aversion, weak productivity growth and lower investment demand. they all tend to lead to an excess demand for safe assets. because most of these trends are likely to continue in the future, the natural rate is expected to remain low for some time. this means that the effective lower bound will limit the central bank ’ s room for manoeuvre more often in the future. so spells of very low interest rates mean trouble for central banks. but they may be good news for governments. low interest rates tend to increase the impact of fiscal policy on the economy. in fact, recent empirical evidence shows that the impact of government spending on output is larger when the effective lower bound on interest rates is binding. intuitively, this makes sense. raising public expenditure in a low interest rate environment does lead to more private spending, because the nominal interest rate remains low and is expected to remain low. in fact, a fiscal expansion could actually have a crowd

will continue to be substantial, even though the euro area economy has been growing strongly and labor markets have remained extremely tight. some countries recently announced an extension of 2022 fiscal packages and / or additional support measures for 2023. while such policies can buffer the impact of negative supply shocks for instance on our citizens ’ purchasing power, they sustain upside risk to inflation. on policy i would like to emphasize that the broadening and deepening of our inflation problem generates the need to act forcefully. a swift normalization of interest rates is an essential first phase, and some front - loading should not be excluded. there is, however, inherent uncertainty surrounding the neutral rate as well as on the question whether going to neutral will be sufficient to bring inflation back to target. this implies that the path and end point for the policy rate remain uncertain. it would probably serve us well to simply continue raising our policy rates until the inflation outlook becomes consistent again with our symmetric 2 % target over the medium - term. as model outcomes inherently lack robustness in the aftermath of such unprecedented shocks, we need to give more weight to actual underlying inflation dynamics in our monetary policy decisions. that also implies that we will continue to take our decisions on a meeting - by - meeting basis. beyond policy rate increases, the relatively flat yield curve shows that the size of the central bank ’ s balance sheet is and should become an important element of the normalization process as well, and i expect the issue of app - reinvestments to feature more prominently in our discussions at a later point in the year. thank you.