On the basis of these and other data, recent analyses by ECB staff members suggest that the transmission mechanism of monetary policy is normalising.6 The impact of a monetary policy tightening on economic activity – at almost all horizons – is currently not statistically different from pre-crisis regularities. The impact on inflation shows a similar pattern in terms of time variation.7 In sum, the monetary policy framework of the ECB allows policy rates to be changed according to macroeconomic and price developments area-wide, while its non-standard measures aim to maintain monetary policy transmission so as to make the stance of policy rates effective throughout the euro area. The standard and non-standard measures thus complement one another. The standard monetary policy instrument has been used to pursue the ECB’s primary objective of price stability in the euro area as a whole. The non-standard measures have addressed the impediments to monetary policy transmission stemming from financial market dislocations and related threats to financial stability, and have thus helped to avoid cross-country divergence arising from discrepancies in the national transmission of the common monetary policy. These measures have maintained the effectiveness of the single monetary policy in challenging circumstances. During the crisis, the credibility of the ECB has been instrumental in ensuring that medium-term inflation expectations have remained well-anchored around price stability. This, in turn, has significantly helped to ensure that lower nominal yields at various maturities translate into lower real interest rates, and thus support aggregate demand and avoid the spectre of a deflationary spiral.

But, at the same time, I do not think that cross-country differences in Monetary Union, which raise the potential for persistent divergence of economic performance, can or should be ignored. Looking forward, the financial crisis and its impact on the functioning of financial markets in some countries has led to a situation in which cross-country heterogeneity owing to differences in monetary policy transmission may be more pronounced than before the crisis – at least if effective remedial measures are not taken. This new environment has posed, and will continue to pose, challenges to the single monetary policy. How is the ECB dealing with these challenges? Since the start of the financial crisis, the ECB has implemented a set of non-standard measures, taking advantage of the range of instruments available within the Eurosystem’s framework for the implementation of monetary policy. Foremost among these measures has been the adoption of a fixed rate tender procedure with full allotment in the ECB’s monetary policy operations. In conjunction with the flexible nature of the Eurosystem’s collateral framework, these measures allow banks to obtain funding even in the face of market dislocation.5 This has avoided a disorderly deleveraging of bank balance sheets and the associated potential for a fire sale-driven, vicious downward spiral in asset prices and bank capital. In the face of the sovereign debt crisis these non-standard measures, supplemented by targeted asset purchases under the ECB’s Securities Markets Programme, have addressed and contained the country-specific impediments to monetary policy transmission.