bear the liability. " this tenet was so dear to him that he declared it a constitutive principle of our economic order 1 / 13 bis central bankers'speeches for, in his view, economic agents will make responsible decisions only if the liability principle is enforced. for instance, when banks become so big that their failure could bring the entire financial system to its knees, they can rely on politicians to throw them a lifeline if they run into difficulties. thanks to this implicit insurance policy against the risk of insolvency, the banks benefit from a funding advantage even in normal times, as investors perceive the risk of default to be lower, and the capital market, deeming them too big to fail, therefore cuts them a certain amount of slack. furthermore, complex financial market products and confusing market structures had caused a fog to descend on the financial markets, with the resulting lack of transparency likewise serving to help drive the mispricing of risk. as a result, many banks were therefore undercapitalised in terms of their balance sheet risk. but the rules that apply to enterprises, banks and investors must ultimately apply to governments, too. their purse strings also tend to be loosened if they are absolved, either in part or in full, from bearing the financial consequences of their projects. in a monetary union, the impact of one country ’ s debt - felt in the form of rising interest rates – becomes more widespread across all of the other member states, not only because of the single capital market but also, similarly to the response to the too - big - to - fail problem, it makes sense for member states to come to each other ’ s rescue during times of crisis. to this extent then, too, there is a greater incentive to run up debt. of course, the founding fathers of monetary union were well aware that, as a general rule, unsound public finances are an achilles ’ heel to a monetary union in which a single monetary policy has been put in place while fiscal policy remains a matter of national responsibility. for this reason, the framework of monetary union is actually designed to safeguard sound public finances. in addition to setting out annual budget deficit and debt ceilings, it highlights the member states ’ individual fiscal responsibility. a no - bailout clause was introduced precisely to prevent euro - area countries from stepping into the breach for another member state and providing financial aid. the thrust of both measures is keep in check those financial risks to which the euro - area countries may

homepage [ / en ] press [ / en / press ] speeches [ / en / press / speeches ] reflections on the eurosystem ’ s new operational framework speech at the konstanz seminar on monetary theory and monetary policy 16. 05. 2024 | konstanz | joachim nagel check against delivery. 1 introduction 2 the road to the current operational framework 3 the eurosystem ’ s new operational framework 4 the trade - off between market activity and volatility 5 closing remarks 1 introduction dear participants at this year ’ s konstanz seminar. it is a great pleasure and a privilege to be here with you and to deliver the speech for the policy session. i am sure you all enjoyed your lunch, but i hope that you are still hungry for some more food for thought. as you all know, karl brunner ’ s original intention for the konstanz seminar was to connect economists from europe, especially germany and switzerland, with top aca ‐ demics from the us ( united states ). [ 1 ] in my address today, i would like to build another connection : between monetary theory and monetary policy implementation. and as you may know from my cv ( curriculum vitae ), this connection is particularly dear to me, as i have been deeply involved in policy implementation during my career at the bundesbank. in most macroeconomic models, the central bank simply “ administers ” the short - term interest rate “ i ”. the future path of this overnight interest rate then determines medium to long - term interest rates, and thus the borrowing costs of economic agents that exer ‐ cise demand for goods and services. don ’ t get me wrong here : i am not saying that this simplification is unreasonable. but in order to make this simplifying assumption, a lot has to happen behind the scenes – in the world of monetary policy implementation. this world is mostly inhabited by central bank economists, as a search for works on monetary policy implementation shows. the most cited paper on monetary policy implementation, claudio borio and piti disyatat ’ s “ unconventional monetary policies : an appraisal ”, has around 1, 200 citations. [ 2 ] that sounds quite impressive. these authors struck a nerve when central banks worldwide started to delve into the world of quantitative easing. the second most cited work, ulrich bindseil ’ s “ monetary policy implementation : theory, past, and present ”, has been cited almost