willem f duisenberg : the role of financial markets for economic growth speech delivered by dr willem f duisenberg, president of the european central bank, at the economics conference " the single financial market : two years into emu ”, organised by the oesterreichische nationalbank and held in vienna, on 31 may 2001. * * * introduction it is a great pleasure and honour for me to join the oesterreichische nationalbank for its 2001 economics conference on " the single financial market : two years into emu ". i would like to take the opportunity today to talk about the role of financial markets for economic growth. i shall first consider whether the design of the financial system matters for economic growth. secondly, i shall say a few words about where the euro area financial system is heading, two years after the introduction of the euro. after this i shall discuss the role of monetary policy in the interplay between financial markets and economic growth. towards the end, i shall address, as just mentioned by governor liebscher, the role of central banks in prudential supervision. does the financial system matter for economic growth? in the financial system funds flow from those who have surplus funds to those who have a shortage of funds, either by direct, market - based financing or by indirect, bank - based finance. the former british prime minister william gladstone expressed the importance of finance for the economy in 1858 as follows : " finance is, as it were, the stomach of the country, from which all the other organs take their tone. " the financial system comprises all financial markets, instruments and institutions. today i would like to address the issue of whether the design of the financial system matters for economic growth. my view is that the answer to this question is yes. according to cross - country comparisons, individual country studies as well as industry and firm level analyses, a positive link exists between the sophistication of the financial system and economic growth. while some gaps remain, i would say that the financial system is vitally linked to economic performance. nevertheless, economists still hold conflicting views regarding the underlying mechanisms that explain the positive relation between the degree of development of the financial system and economic development. some economists just do not believe that the finance - growth relationship is important. for instance, robert lucas asserted in 1988 that economists badly over - stress the role of financial factors in economic growth. moreover, joan robertson declared in 1952 that " where enterprise leads, finance follows ".

liquidity to the financial system. these actions, together with similar measures in many other countries, appeared to stabilize the situation and to improve investor confidence in financial firms. notably, spreads on credit default swaps for large u. s. banking organizations, which had widened substantially over the previous few weeks, declined sharply on the day of the joint announcement. going forward, the ability of the treasury to use the tarp to inject capital into financial institutions and to take other steps to stabilize the financial system – including any actions that might be needed to prevent the disorderly failure of a systemically important financial institution – will be critical for restoring confidence and promoting the return of credit markets to more normal functioning. as i noted earlier, the federal reserve has taken a range of policy actions to provide liquidity to the financial system and thus promote the extension of credit to households and u. s. department of the treasury, emergency economic stabilization act website. businesses. our recent actions have focused on the market for commercial paper, which is an important source of short - term financing for many financial and nonfinancial firms. normally, money market mutual funds are major lenders in the commercial paper markets. however, in mid - september, a large fund suffered losses and heavy redemptions, causing it to suspend further redemptions and then close. in the next few weeks, investors withdrew almost $ 500 billion from prime money market funds. the funds, concerned about their ability to meet further redemptions, began to reduce their purchases of commercial paper and limit the maturity of such paper to only overnight or other very short maturities. as a result, interest rate spreads paid by issuers on longer - maturity commercial paper widened significantly, and issuers were exposed to the costs and risks of having to roll over increasingly large amounts of paper each day. the federal reserve has developed three programs to address these problems. the first allows money market mutual funds to sell asset - backed commercial paper to banking organizations, which are then permitted to borrow against the paper on a non - recourse basis from the federal reserve bank of boston. usage of that facility peaked at around $ 150 billion. the facility contributed importantly to the ability of money funds to meet redemption pressures when they were most intense and remains available as a backstop should such pressures reemerge. the second program involves the funding of a special - purpose vehicle that purchases highly rated commercial paper issued by financial and nonfinancial businesses at a term of three months. this facility