the ecb – like many other central banks – has decided to develop its own research capability from its start. first, central banks need research - oriented economists to follow the latest developments in economics and to recognise their potential relevance for policy - making. let me provide an example based on the sustainability of a country ’ s external imbalance – a topic that greatly benefited from the work of professor rey. the literature has recently pointed to the limits of traditional approaches to the balance of payments, where currency depreciation provides the bulk of the adjustment needed to correct a country ’ s current account deficit. traditional approaches fail to realize the consequences of financial globalization for the sustainability and adjustment of the external position. in the presence of variation in asset returns, cross - border asset holdings introduce valuation effects that decouple the dynamics of net foreign assets from that of current accounts, altering the role of the trade balance in correcting a country ’ s external position. recent research at the ecb has been very enlightening in this respect. a second reason for conducting research in a central bank is that a major task of central bank research is to bridge the possible gap between academics and policy makers and to create occasions for interactions with the academic community where the diversity of views can be expressed and discussed. for instance, at the ecb we are convinced that a thorough analysis of monetary developments – our “ monetary pillar ” – is important for the conduct of monetary policy and for the anchoring of inflation expectations. our view is supported by the strong empirical link between money growth and inflation over the long - run and by theoretical considerations relating to the ability of monetary and credit aggregates to point at imbalances in the financial system and inflationary risks. looking at the historical experience, the analysis of monetary developments has helped the ecb to assess the risks to price stability, to identify the nature of the shocks impacting on the euro area and to signal its medium - term orientation. this has been a key factor in anchoring agents ’ expectations and in establishing the high credibility of the ecb. to broaden and deepen the monetary analysis we trust that it is important for us to have an ongoing, direct and candid openness to discussion with the academic world. an example is provided by the 4th ecb central banking conference on " the role of money and monetary policy in the twenty - first century ", where the ecb engaged in an open debate with academics on this important topic. a third argument to invest in central

the welfare costs of instability can be very high. it is important that we are aware of the trade - off between growth and stability when designing an institutional framework for the future in which finance is not excessive. the second question is even more important, as it refers to the degree to which we can expect robust financial sector - driven growth in europe once the banking union becomes operational and all the problems related to bank balance sheet weaknesses have been properly addressed. it is my contention that the european economy is gripped by problems that are more serious than bank deleveraging and also of greater consequence, because it is not immediately clear how to address them. i will argue that even when bank balance sheets have been fully repaired, structural problems related to the slowdown in emerging markets, bis central bankers ’ speeches to weak domestic demand, and to structural phenomena such as the ageing population will continue to hamper european growth prospects. finance and growth : an overview the empirical literature on finance and growth has accumulated a substantial body of evidence on the positive relationship between financial development and long - term economic growth over the past 20 years. from the academic literature, we have learned that countries with higher levels of financial development grow at a faster rate. industries which have a greater need for external finance and face better growth opportunities grow faster in countries with a higher level of financial development. 1 this positive effect has a well - known microeconomic underpinning : financial deepening alleviates financing constraints at the firm level, allowing firms to grow by engaging in higher capital investment and r & d investment, among other things. 2 this large body of evidence strongly supports the view that by inducing a positive resource reallocation and by supporting the creative destruction - driven process of technological innovation, financial deepening has a transformational effect on the real economy. at the same time, the global financial crisis of 2008 – 09 reminded us of the perils of finance. academic research has suggested that financial development does not have a uniformly positive effect on economic growth, at all levels of financial intermediation. the evidence points to the fact that there is a threshold beyond which the positive effect of finance on growth starts petering out. 3 a bis paper puts that threshold at 100 % to 150 % of gdp. 4 there are different reasons for this concept of a threshold. for example, an excessively large financial industry can lead to a migration of talented individuals away from productive sectors. 5 alternatively, as the financial sector grows too large, financial intermediaries can