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Source: Bank for International Settlements

‘It is fiscal policy that has to be in the lead in mitigating the macro-economic consequences of this prolonged public health emergency. Efforts that monetary policy can support by keeping financing costs low for all borrowers.’ This was one of the messages governor Knot delivered at the Euro50 Group Videoconference. Knot spoke about the impact that COVID-19 will have on the ongoing ECB’s monetary strategy review.

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(I) Setting the stage

In my remarks, I want to take a look at current efforts by central banks to review their monetary strategies. I will do this from a euro area perspective.

To set the stage, let me describe how the macroeconomic environment in which central banks operate has changed markedly since 2003, when the ECB last reviewed its monetary strategy. This was the motivation for the ongoing review.

The main changes include:

1. The fall in the natural real rate of interest, often called r-star. While notoriously uncertain and dependent on modelling assumptions, estimates of the equilibrium interest rate have declined visibly

since the early 2000s (see Chart 1).

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