type mechanism between euro area countries to buffer large country - specific economic shocks. such a function would ensure a form of fiscal solidarity exercised over economic cycles, improving the resilience of the euro area as a whole and reducing the financial and output costs associated with macroeconomic adjustments ”. implications for economic research let me now briefly recall the research progress that we have made in the ecb in terms of understanding the role of the financial sector in the macroeconomy. as i noted above, one reason why the importance and risks of financial developments were not identified earlier is that, before the crisis, financial sectors were basically absent or immaterial in the standard macroeconomic models that central banks tended to use. it is important that the economics profession manages to change this as soon as possible. in this context, more than two years ago the ecb and the other central banks of the european union have started a major research initiative in this regard, the macroprudential research network ( mars ). 7 a sub - team of mars has made key steps in integrating realistic characterizations of widespread financial instability into models of the aggregate economy, in analysing the transmission channels between financial instability and macroeconomic variables, in explaining the recent crisis, and in assessing policies addressing systemic risk. 8 some of these new models do a fine job in explaining how financial imbalances contributed to macro imbalances in periphery countries. for example, these models predict that if there are large international capital flows into a low - growth country, then excessive investment is allocated to low - productivity projects ( such as housing ). with such a supply - driven credit boom, interest rates go down, incentives in the banking sector deteriorate, and financial fragility arises endogenously. such countries end up running large current account deficits and their banking sectors become overleveraged, which sooner or later precipitates a financial crisis. despite what we have learned thanks to our internal research endeavours, we also need the wider economic profession, in particular academia, to engage more forcefully in this research agenda. we highly value our interaction with academia and the benefits from combining policy experience with analytical rigour. despite a few valuable efforts, 9 we feel that much more needs to be done, so that the young phd ’ s we hire from universities are well equipped with analytical tools that reflect both standard macroeconomic relationships and how they are altered by the activities of financial intermediaries – and, of course, their potential for

target. two elements need to be borne in mind when assessing this baseline. first, the transmission of the restrictive monetary policy stance adopted so far is still unfolding. our estimates suggest that the interest rate hikes implemented in 2022 - 2023 are still working their way through the economy, and that their impact on inflation may be stronger in 2024 than in 2023. 11 second, the effect of any rate cuts is likely to be mitigated by the ongoing contraction of the eurosystem ’ s balance sheet. this could make the normalization phase different from the past, for instance by affecting bank funding costs and credit supply. indeed, the data collected through the bank lending survey ( bls ) indicate that the reduction in the monetary policy asset portfolio is already having a tightening effect on bank lending conditions ( figure 7 ). most importantly, the baseline – no matter how carefully constructed – is only one of many possible outcomes. the key lesson of the past four years is that policymakers also need to consider alternative scenarios. allow me therefore to qualify the picture by highlighting the main risks that the euro area may face over the medium term. between 2013 and 2019, gdp in the euro area grew on average by 1. 9 percentage points per year. weak growth may partly reflect headwinds coming from the credit market : bank funding costs remain onerous, lending rates on new loans are still very high, and loan growth continues to be subdued for both firms and households. panetta f., 2024, ‘ challenges for monetary policy transmission in a shifting landscape ’, speech delivered at the inaugural conference of the research network on ‘ challenges for monetary policy transmission in a changing world ’, european central bank, frankfurt am main, 25 april. figure 7 impact of the ecb ’ s monetary policy asset portfolio on credit supply ( half - yearly data ; net percentage shares ) ( a ) credit standards ( b ) terms and conditions −3 −3 −5 −5 −6 −10 −6 enterprises households for house purchase −10 consumer credit and other lending source : ecb bank lending survey ( bls ). notes : the figure shows banks ’ replies to the bls question on the impact of the ecb ’ s monetary policy asset portfolio on their credit standards ( panel a ) and terms and conditions ( panel b ) for loans to enterprises and households. a positive net percentage share indicates a tightening impact in the preceding six - month period. the last observation refers to the april 2024 survey