10 Campbell, J. R., C. L. Evans, J. D. M. Fisher, and A. Justiniano (2012), “Macroeconomic effects of Federal  Reserve forward guidance,” Brookings Papers on Economic Activity, 43(1): 1‒54 and Del Negro, M., Giannoni, M. and C. Patterson (2015) “The Forward Guidance Puzzle,” Federal Reserve Bank of New York Staff Reports, no. 574. 11 Notable contributions include Del Negro, M., Eggertson, G., Ferrero, A. and Kiyotaki, N. (2017), “The Great  Escape: a quantitative evaluation of the Fed’s liquidity facilities”, American Economic Review, 107(3): 824–857; Gertler, M. and Karadi, P. (2011), “A model of unconventional monetary policy”, Journal of Monetary Economics, 58 (1): 17–34; Gertler, M. and Kiyotaki, N. (2015), op. cit. ; Suarez, J. and Martinez-Miera, D. (2014), “Banks’ endogenous systemic risk-taking”, mimeo; Brunnermeier, M. and Sannikov, Y. (2014), “A macroeconomic model with a financial sector”, American Economic Review, 104(2): 379–421. 12 Curdia, V. and M. Woodford (2011), “The Central-Bank Balance Sheet as an Instrument of Monetary Policy,”  Journal of Monetary Economics. ; Gertler, M. and Karadi, P. (2011), ibid. 13 Krishnamurthy, A. and A. Vissing-Jorgensson (2013), “The ins and outs of LSAPs,” Federal Reserve Bank of  Kansas City Jackson Hole Symposium; Gertler, M. and Karadi, P. (2013), “QE1 vs. 2 vs. 3: A Framework to Analyze Large Scale Asset Purchases as a Monetary Policy Tool”, International Journal of Central Banking, 9(S1): 5-53; Altavilla, C., Carboni, G. and R. Motto (2015) “Asset Purchase Programmes and Financial Markets: Evidence from the Euro Area,” ECB Working Paper, no.1864; Andrade, P. et al.

This played a vital role in fostering the euro area recovery that is currently under way. Financial sector policies The greater awareness of the costs of financial instability and of financial frictions has also resulted in a revamp of financial sector policies. First, financial sector regulation and supervision are much stricter. The quality of regulatory capital has improved and its quantity has increased. In the euro area, banks have materially bolstered their capital positions, with the average common equity Tier 1 ratio of significant institutions rising to 13.5% by end-2016 from 7% in 2008. The establishment of a new stress testing framework lends a further quantitative dimension to the process of ensuring that, even in a pre-defined “stressed scenario”, financial institutions should remain well capitalised and able to continue lending to creditworthy borrowers. Second, policymakers have acquired new macroprudential tools to mitigate the effect of financial cycles on the economy. Across the globe, authorities have imposed measures such as loan-tovalue and loan-to-income ratios, to reduce the endogenous link between credit and house prices. This new macroprudential approach to regulation aims to safeguard not just the solvency of individual banks but also the systemic integrity of the banking system and its ability to continue providing finance to the non-bank private sector. In addition to the overall global move to stricter regulation, there have been also a number of institutional improvements. In the euro area, banking supervision is now carried out by the Single Supervisory Mechanism, composed of the ECB and the national competent authorities.