yields, the stronger the impact of government bond purchases. what effect do you expect in the case of the ecb? given the low interest rates in the euro area, i have my doubts as to whether the economic effects of the purchase programme will be able to reach the desired order of magnitude …... and finance ministers are pleased that they can cheaply run into debt. that is a crucial disadvantage of the purchase programme. i am absolutely aware of the danger that the low costs of financing alleviate the pressure on governments to consolidate their public budgets and tackle the necessary structural reforms. expansive monetary policy can only provide an impetus for more growth. the decisive impulses must come from economic policies. are zero per cent yields on german government bonds justified too? depending on the class of securities, we are in negative territory in some cases. to the extent that the decline in yields on german government bonds can be traced back to the purchases by the ecb, i take a critical view. in germany the low interest rates are threatening to overheat the economy. i would not speak of an overheating of the economy, of an excess of economic growth in germany. the german economy may be able to absorb a higher key rate of interest but the same cannot necessarily be said for the euro area as a whole. a crucial point is that the ecb has to pursue monetary policy for the whole euro area, not just for one country. and it ’ s also essential that we look at price stability in the medium term and at medium - term inflation expectations. however, medium to long - term inflation expectations have clearly fallen ; that is why the current low key interest rates are definitely justified. but we should not forget that we cannot have a low key interest rate without undesirable side - effects. we must bring interest rate levels back to normal as soon as possible. do you understand why savers, banks and insurance firms become critical when they suffer from extremely low interest rates? i can well understand those concerns. a prolonged low inflation rate environment carries risks for banks and insurance firms. low interest rates increase the danger of riskier investment behaviour ; overheating or price bubbles in other asset classes can easily arise.... especially, when an economic region as heterogeneous as the euro area is governed by a single interest rate. the more heterogeneous an economic area, the harder it is to govern with a single interest rate. that is of course felt especially painfully when economic

the famous zero lower bound ( zlb ). the euro area, as i will mention at the end, reached the lower bound through a different avenue. and the end point of that journey, as you know, was not zero, but a negative point. remark 1 : the zlb constraint has turned out to be more binding than previously thought. what was the pre - crisis consensus? as concerns the united states, let me quote from the paper entitled “ have we underestimated the likelihood and severity of zero lower bound events? ”, written by john williams and co - authors working for the board of governors of the federal reserve system. 2 the paper documents predictions from the fed ’ s frb / us model ( a large - scale macroeconometric model ) for the frequency and duration of zlb episodes. the key finding is that, “ if monetary policy followed the prescriptions of the standard taylor ( 1993 ) rule with an inflation target of 2 percent, the federal funds rate would be near zero about 5 percent of the time and the “ typical ” zlb episode would last four quarters ”. moreover, “ the zlb would have relatively minor effects on macroeconomic performance under these policy assumptions. ” with regard to the euro area, you may recall that zero lower bound considerations were a relevant concern for the ecb ’ s strategy review in 2003. at that time, the governing council clarified that, within the ecb ’ s definition of price stability of positive inflation rates below 2 %, it would aim to maintain inflation rates “ below, but close to, 2 % ” over the medium term. this clarification was seen to offer a safety margin away from zero nominal interest rates and zero or negative inflation rates. in this spirit, the overview of the background studies concluded that “ most available studies indicate that the likelihood [ of hitting the zlb ] decreases to very low levels when the objective of the central bank is to set an inflation rate above 1 % ”. 3 these quotes describe the view which prevailed prior to the crisis. but today, for the united states, it is nearly seven years ago that the bound was reached. and for the euro area, seven years after the collapse of lehman brothers, we are still struggling with headline inflation near zero. most likely, it will still take some time before the governing council ’ s aim chung, h., laforte, j. - p., reifschneider, d. and williams, j.