the relative merits of low inflation versus having more monetary policy leeway in times of crisis. i believe that increasing central banks ’ inflation targets would be to draw the wrong conclusion. see v constancio ( 2015 ), financial stability risks, monetary policy and the need for macro - prudential policy, speech at the warwick economics summit, 13 february 2015 ; deutsche bundesbank ( 2015 ), the importance of macroprudential policy for monetary policy, monthly report, march, pp 39 - 71. see eg o blanchard, g dell ’ ariccia, p mauro ( 2010 ), rethinking macroeconomic policy, imf staff position note, spn / 10 / 03. bis central bankers ’ speeches first of all, it has to be noted that the zlb is not hard and fast. several central banks have set negative deposit rates without immediately spurring a flight to cash, because holding cash in large volumes is not free of charge, either. moreover, central banks have shown during the crisis that they can choose from a repertoire of unconventional measures to further loosen the monetary policy stance when interest rates are already close to zero – although some of the unconventional measures are more problematic than others. what is more, results from macroeconomic models advise against inflation targets of more than 2 %. the optimal inflation rate derived from such models is around 2 % – if the zlb is explicitly taken into account. what is the underlying intuition for this result? higher inflation targets reduce the risk of being restricted by the zlb. but while these events are rather rare, higher inflation targets actually increase the welfare costs of inflation – period by period! to quote a paper by coibion and co - authors : " ( … ) raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero bound episodes. " 9 a key point from an economic policy perspective, though, is this : behind the low interest rates are the low inflation pressure and the modest growth outlook – not only in the euro area but worldwide. what is needed, therefore, are strategies for boosting trend growth. and these strategies should not rely on ultra - loose monetary policy or more debt - financed expansionary fiscal policy, but first and foremost on structural reforms that enhance productivity. in this respect, i share the view of the bis, which, in its current annual report, calls for a rebalancing of economic policy. " the aim is to replace the debt - fuelled

shift the japanese economy onto a higher growth path on a lasting basis. however, the preliminary effects of japan ’ s expansionary monetary policy and its stimulative fiscal policy are in danger of dissipating as the economic upturn was partly attributable to clear anticipatory effects prior to a vat hike. what is more important, however, is that the announced structural reforms, notably measures to liberalise the services market and to expand labour force participation, have not actually been implemented yet. monetary policy cannot solve structural problems. such problems can only be remedied by political means, through growth - friendly reforms. and that is why i would like to talk to you today about what we can actually do to raise the growth potential of our economy. please note that the observations i am about to make are not exhaustive. for example, i will not broach the subject of energy policy which is particularly relevant for german enterprises in terms of how it affects competitiveness. nor will i be commenting on the consequences of demographic change, which i already addressed in my speech yesterday. bis central bankers ’ speeches returning to will rogers ’ aphorism, today i intend not so much to focus on central banks per se as on the forces of fire and the wheel. for both of these inventions have galvanised productivity. without fire we would have no energy and without the wheel there would be no mobility. it was the american nobel prize - winning economist, robert solow who first showed how inventions, or technological progress as we would probably say today, and economic growth are connected, to which end he used his own model. the acclaimed solow growth model may be over 50 years old but it has lost none of its effectiveness in giving crucial insights into how growth, investment and technological progress interact. 2. investment and growth one of the key insights provided by the solow model is that in the early stages of an economy ’ s development, growth is driven by the accumulation of capital, whereas at a more progressed stage of its development, the chief determinant of growth is the rate of technological progress. but there is another more decisive factor at play : in the long run, it makes little sense to invest in a mature economy unless it is technologically advanced or has an abundant supply of labour at its disposal. for these two factors are key to inducing higher income expectations on the part of enterprises. which brings us to the crux of the debate about growth - friendly economic