Why Have Policy Rates Been so Persistently Low in the Euro Area?

Frank SMETS * Chercheur, Département économique, Faculté d'économie et de gestion d'entreprise, Université de Ghent, Belgique. Contact : frank.smets@ugent.be.

Short-term rates have been negative in the eurozone since 2014. This paper demonstrates that the central bank has been constrained in its responses to a disinflationary environment after the financial crisis. The ECB's new strategy, adopted in July 2021, emphasizes a disinflation control objective. Will interest rates, which are in fact directed by the ECB, be able to evolve naturally at a level consistent with potential growth and the inflation target of around 2%?