to address the threats to financial stability. indeed financial regulation and supervision are currently seeing a major overhaul. this includes a new institutional framework for micro - and macro - supervisions, and also some first – if still insufficient – steps towards a more european approach on bank deposit insurance and bank resolution. all these initiatives are eventually expected to not only foster fiscal and financial stability, but also to mitigate the vicious feedback loop that arises when one of the two becomes jeopardised. sound public finances and a stable financial system create a favourable background for monetary policy. in fact, the interplay between monetary policy, on one side, and fiscal policy or financial stability issues, on the other side, has since long been identified. the point has been made again today and we will hear further thoughts tonight at the “ armchair debate ” on “ financial fragility and the role of the central bank ”. however, the crisis has underlined that there are not only two axes of interaction – monetary policy vis - a - vis fiscal policy, and monetary policy vis - a - vis financial stability – but that there is a complete interaction triangle, including the fiscal - policy financial - stability nexus as a third important edge. the challenge for policy makers arises as the poles of this triangle are all endogenous to one another. this brings me back to my initial remarks on monetary policy. unsound public finances, various forms of financial instability and the hazardous interplay between them can eventually jeopardize the smooth transmission of the monetary policy stance. with our non - standard measures we had – at least in part – to address negative externalities from other policy areas, while remaining faithful to our mandate to safeguard price stability. let me stress towards the end of my remarks that the defence of price stability never leaves room for complacency. borrowing the terminology that matthew canzoneri used in his presentation : the war on inflation is essentially never over, but is rather an on - going battle. i would like to stress in this respect that at the ecb our two - pillar strategy – i. e. the use of economic and monetary analysis – has given us very useful guidance in determining the appropriate monetary policy stance for maintaining stable prices in the euro area. i appreciate that in markus brunnermeier ’ s new conceptual framework that he presented today, the monitoring of credit growth and monetary aggregates is identified as an essential ingredient of successful monetary policy making. a key condition for continued success is that our

measures. because the central bank may be expected to use its virtually unlimited “ firepower ”, the need for making the painful, but necessary, adjustments may easily be forgotten by the other actors – be they banks or sovereigns. as there have been three challenges in implementing non - standard measures, so there are three conditions to be met for non - standard measures to be effective. first, non - standard measures should remain temporary. the central bank should outline its strategy for an exit from these measures as soon as economic and market conditions make it possible. ideally, non - standard measures should include built - in exit mechanisms. for instance, the ability to repay after one year and the fact that the interest rate automatically adjusts alongside the mro rate are two crucial features of the three - year ltros. as a second condition, the central bank should have a strong and credible communication. there should be no doubt that non - standard measures are no substitute for the necessary fundamental adjustments. strong incentives should be maintained for an orderly deleveraging of banks and for the sovereigns ’ fiscal consolidation and structural reforms. finally there should be no doubt on the central bank ’ s independence. third, the central bank should remain alert and flexible in its approach to standard and non - standard monetary policy but inflexible in the pursuit of its mandate of price stability. i am convinced that the ecb has done a good job in maintaining this delicate balance. our non - standard measures have contributed to maintaining the anchoring of inflation expectations at a level consistent with our medium - term objective. i also believe that the non - standard measures have strengthened the ecb ’ s credibility as a reactive, effective and flexible central bank with regards to the means it employs to achieve its objective but also as a central bank determined in the pursuit of price stability, which is, of course, its ultimate objective. this is an important legacy, which will help limit the damage of the next liquidity crisis when it occurs. 3. monetary policy, sovereign debt and financial instability let me now come to the second main topic we have been discussing today. talking about credibility, matthew canzoneri pointed out that the 1980s and 1990s may be characterized bis central bankers ’ speeches as a “ war on inflation and inflation credibility ”. as you all know, central banks in major industrialized countries have eventually succeeded in their quest to bring down inflation to low levels and restore credibility. this experience reinforced two key insights for monetary policy making. first, that