Technological developments on markets may however have gradually reinforced this type of behaviour, as participants are increasingly incited to follow their peers through matching the performance of a benchmark. There is no doubt that the spread of benchmarking allows fund managers and clients to better assess their performance against that of other funds. But, in a context of growing competition within the sector, it may well have increased mimetic behaviour. Some economic operators (whose own compensation is closely linked to the relative, rather than absolute, profit and losses they generate) may indeed have come to the conclusion that it would be better to be wrong along with everybody else, rather than running the risk of being wrong alone. A striking example of rational mimetic behaviour is the influence that hedge funds enjoyed as "opinion leaders" and trend makers. By its nature, trend following amplifies the imbalance that may at some point affect a market, potentially leading to vicious circles of price adjustments and liquidation of positions. •  Another factor to be taken into consideration is the spectacular development of certain fund management techniques, such as index management. As it has proven very popular on equity markets, index management may have contributed to exacerbating movements in financial asset prices. Because their goal is to mimic the performance of indexes, “passive managers” try constantly to match the composition of their benchmark. They thus help to amplify market trends, buying more as the market rises and liquidating more as the market drops.

Possible policy implications of such developments from a monetary and a financial stability perspective  All the factors I have just mentioned require authorities to consider – in conjunction with the financial industry – ways of preserving monetary and financial stability in this changing environment. A. A stability-oriented monetary policy is a fundamental prerequisite for the smooth functioning of financial cycles. Financial deregulation has radically changed the conduct of monetary policies. More open economies and greater interdependence between financial systems have completely overhauled the context in which monetary policy is implemented. •  Financial markets can now penalise inflationary monetary policies by withdrawing capital, with a subsequent rise in long-term interest rates and/or depreciation of the exchange rate. •  At the same time, monetary policy transmission mechanisms have become more diversified and complex. This situation has prompted the authorities to separate the different instruments for implementing economic policy. In this context, monetary policy has been clearly been assigned the objective of maintaining price stability. Today, monetary policies are conducted within a framework characterised by three features: •  Firstly, reducing inflation expectations depends on compliance with a number of rules that have been clearly defined in advance. Consequently, this policy can only be effective if the authority responsible for defining and implementing it is credible. The conjunction of a clear, overriding objective of price stability (which has been explicitly laid down in the statute of the ECB), with well-established institutional independence ensures the continuity of the monetary policy decisions made by the authorities.