to purchase assets of which the supply is limited or inflexible, such as real estate. 10 we are prepared to use our micro - and macro - prudential instruments to face the risks of bubbles and excessive leverage, but if the lower bound were effectively abolished, those risks would increase and may lead to macroeconomic instability along this dynamically inefficient path. third, we have to reflect on why we have reached the lower bound in the euro area in the first place. an important issue here is the possibility that the natural real rate may have fallen very low or even gone negative ; this could occur for various reasons such as low productivity or a slowdown in population growth, both of which are relevant for the euro area. a protracted period of deleveraging in the euro area, similar to the one which occurred in japan in the 1990s, could also have pushed the natural real rate down, even into negative territory, see m. draghi, 2015. “ the ecb ’ s recent monetary policy measures : effectiveness and challenges ”, camdessus lecture, international monetary fund, washington dc, 14 may. see g. claeys and z. darvas, 2015. “ the financial stability risks of ultra - loose monetary policy ”, bruegel policy contribution, issue 2015 / 03. bis central bankers ’ speeches and potentially for a long time. 11 this is related to the so - called “ secular stagnation ” hypothesis. 12 this scenario may also be consistent with a gloomier view of recent bond market developments than the one i have provided above. real forward interest rates indeed suggest that the expected short - term real interest rate about ten years ahead is around – 1 %, while expected euro area gdp growth for the period six to ten years ahead stands at 1. 4 % ( according to the consensus forecast ). if forward markets were correct, then the fall in longterm yields would not due to a generalised reduction in the market price of risk, and thus a flattening of term and risk premia induced by our extended asset purchase programme. it would be rather a reflection of a generalised fall in real interest rates, signifying bleaker prospects for euro area growth. for monetary policy to remain “ neutral ” in such an environment, a lastingly low or negative actual real rate would be needed. it is in response to this that some are proposing to remove the effective lower bound. but my question is, why not instead

august characterised by notably lower market liquidity. the eurosystem is taking this into account in the implementation of its expanded asset purchase programme by moderately frontloading its purchase activity in may and june, which will allow us to maintain our monthly average of €60 billion, while having to buy less in the holiday period. if need be, the frontloading may be complemented by some backloading in september when market liquidity is expected to improve again. the slightly for a discussion of the financial stability consequences of lower market liquidity, see a. bailey, 2015. “ financial markets : identifying risks and appropriate responses ”, speech given at hughes hall, cambridge university, 15 may. bis central bankers ’ speeches higher purchase volume that market analysts may observe in the coming weeks is therefore unrelated to the recent episode of market volatility. other options for dealing with the lower bound the fact that non - standard measures can help to overcome the lower bound constraint does not mean that there might not be other, even more effective ways to deal with it. in this context two types of policy have been put forward : those that take the existence of the effective lower bound as a given and seek to improve the traction of monetary policy in that environment ; and those which aim to remove the lower bound constraint altogether. as regards the first type, several options have been proposed in the literature, but most are unfortunately not very appealing to policy - makers. for instance, blanchard and ball, among others, suggest increasing the inflation objective, for example from 2 % to 4 %. 6 this option, however, would impose permanent costs on the economy in terms of the inefficient allocation of resources associated with a higher inflation rate. another important casualty would be the credibility of the ecb, given that economic agents would entertain the possibility of further changes in the objective in response to future shocks. all in all, raising the inflation target is “ too blunt an instrument ” for achieving the desired objective of stabilising the economy in a low interest rate environment. additional proposals are even more far - reaching. they involve the use of “ active ” fiscal policy to create inflation, or to increase policy interest rates to coordinate expectations on the desired equilibrium of inflation of below but close to 2 %. 7 but neither proposal is practical given our context in the euro area. our forward guidance is based on the notion that we do not intend to raise rates for an extended period of time. and explicit monetary - fiscal policy coordination is neither possible