monetary policy response that brings inflation back, within the range of values that define price stability, to its focal point over a relatively short horizon. “ short ” means here : in line with the minimum time period that monetary policy actions typically take bis central bankers ’ speeches to transmit their impulse to the real economy. this way, inflation expectations are kept anchored and a stable path of the economy toward the new equilibrium is ensured. if the underlying shocks are on the supply side, there might not be an immediate cause for action. the medium term in this case may be stretched beyond the canonical minimum transmission lag and thus provides for an in - built mechanism to see through temporary supply shocks. crucially, this applies only to the extent that you are reassured that long - term inflation expectations remain well anchored. therefore, once it transpires that the supply shock is likely to be of a permanent nature because it is passed through to price and wage setting behaviour, the ecb would act. 9 but the flexibility in the policy - relevant time horizon grants it sufficient time to identify whether the shock is transitory or permanent before changing course. this, in turn, allows for a steady - hand approach to our monetary policy that avoids undue policy - induced economic fluctuations. third, adding to the flexibility deriving from the price stability definition and the variable policy horizon, the ecb has large scope in adopting further tailored measures to address specific market impairments. in this context, deliberations on enhancing the provision of credit in the economy take particular prominence in our current strategy process. so, let me move to the issue of credibility. the attribute of credibility is even more important than flexibility. in fact, credibility is a precondition for a central bank to be able to act flexibly without unhinging market expectations. the extent and success of central bank intervention to stabilise the economy hinges on the credibility of their monetary policy framework. higher - order constraints – an institutional discipline – make the conduct of policy – a lower - order activity – both more flexible and effective. this is due to the following reasons. if market participants are confident that the central bank – in line with its mandate – is determined to offset price pressures, they will immediately factor this into their economic decisions. hence, the mere prospects of future central bank accommodation will induce consumers and firms to shift consumption and investment decisions across time. for instance, in a slump consumers and firms anticipate additional accommodation in the future, thus frontloading consumption and

cost per unit of time of converting a financial asset into money. when market liquidity collapses – in a liquidity crisis – assets that had enjoyed high tradability become illiquid in the sense that trimming exposures is possible only at a large penalty. alessi, l. and c. detken ( 2011 ), “ quasi real time early warning indicators for costly asset price boom / bust cycles : a role for global liquidity ”, european journal of political economy, vol. 27 ( 3 ), pp. 520 – 533. claessens, s., m. a. kose and m. e. terrones ( 2011 ), “ financial cycles : what? how? when? ”, imf working paper no. 76. hollo, d., m. kremer and m. lo duca ( 2012 ), “ ciss – a composite indicator of systemic stress in the financial system ”, ecb working paper no. 1426. jorda, o., m. h. p. schularik and a. m. taylor ( 2011 ), “ when credit bites back : leverage, business cycles and crises ”, nber working paper no 17621. bis central bankers ’ speeches • funding liquidity – an alternative, if complementary concept – measures the ability of a financial institution which engages in maturity transformation to obtain constant funding for its long - term assets. this distinction is at the centre of brunnermeier ’ s and pedersen ’ s ( 2009 ) analysis on the interplay between leverage and liquidity cycles. here, the authors show the reinforcing nature of funding shocks and leverage in shadow - banking intermediation. 6 here, a funding shock materialises in the form of higher haircuts in the repo market, where intermediaries operating in the shadow - banking market – say, a hedge fund – finance the acquisition of assets. for a hedge fund that is financing asset holdings in the repo market, mechanically, a rise in haircuts that is not offset by either slack in the existing equity capital base or an infusion of fresh equity capital will cause the fund to liquidate assets. a collective trend to liquidate assets cannot happen unless prices drop. but a fall - off in asset prices devalues the collateral that is pledged in parallel leveraged operations and more margin calls are triggered. so, the original funding liquidity shock turns into an asset market