Monetary Policy in an Era of Low Average Growth Rates

29-11-2018

Economic growth in the euro area has been sluggish since the onset of the global financial crisis of 2008. While some of this sluggishness reflected cyclical patterns, ongoing weak productivity growth and demographic factors point to slow average growth rates for the euro area in the coming decades. This will most likely translate into a lower equilibrium real interest rate. The ECB should follow the Federal Reserve in providing estimates to the public of average nominal interest rate it expects to set over the long term and that this is likely lower than average rates during the pre-crisis era. The ECB should continue advocating for growth-boosting structural reforms but should also consider advocating for higher immigration levels to improve Europe’s demographic profile and growth potential.

Economic growth in the euro area has been sluggish since the onset of the global financial crisis of 2008. While some of this sluggishness reflected cyclical patterns, ongoing weak productivity growth and demographic factors point to slow average growth rates for the euro area in the coming decades. This will most likely translate into a lower equilibrium real interest rate. The ECB should follow the Federal Reserve in providing estimates to the public of average nominal interest rate it expects to set over the long term and that this is likely lower than average rates during the pre-crisis era. The ECB should continue advocating for growth-boosting structural reforms but should also consider advocating for higher immigration levels to improve Europe’s demographic profile and growth potential.