explicit role for financial conditions in monetary policy so far i have discussed the pre - crisis consensus view on monetary policy and asset prices from a general perspective. the events of the past two years have already generated farreaching reflections on this issue. 11 let me mention three avenues. first, the crisis has clearly demonstrated that the economic costs of the unravelling of imbalances can be overwhelming, notwithstanding extraordinary policy action – involving both monetary and fiscal policies. recent empirical research has explored more systematically the role of monetary policy in shaping the duration and depth of recessions. 12 when no distinction is made with regard to the nature of the downturn, expansionary monetary policy is found to be consistently associated with shorter recessions. however, when considering recessions that occur in combination with financial crises, monetary policy does not have a consistent effect on the duration of recessions. these results undermine confidence in one of the arguments buttressing the pre - crisis consensus view, namely that monetary policy can forestall the negative effects of the unravelling of financial imbalances. second, the crisis has highlighted the fact that asset price misalignments can have different consequences depending on the specific market in which they arise. it may well be true that, in periods of booms in asset prices, expected capital gains are so large that interest rate movements of a standard magnitude would not be sufficient to alter investor decisions. the origins of the recent financial crisis, however, are not in equity prices, but rather related to real estate and to the abnormal growth in securitised credit backed by residential or commercial properties. leveraged financial intermediaries have also played an important role in the recent financial crisis. in this context, recent research has highlighted the fact that even small changes in policy rates can have non - negligible implications for financial institutions, which tend to systematically finance illiquid long - term assets through short - term borrowing. even small changes in short - term interest rates can affect their profitability, forcing them to close some leveraged positions and, potentially, to partially correct any financial imbalances fuelled by such leveraged positions. 13 l. christiano, c. ilut, r. motto and m. rostagno ( 2008 ), “ monetary policy and stock market boom - bust cycles ”, ecb working paper no 955. see, for example, kohn ( 2008 ) and trichet ( 2009 ). see also white ( 2009 ). international monetary fund

. international monetary fund ( 2009 ), “ from recession to recovery : how soon and how strong? ”, world economic outlook, ch. 3, washington dc. kohn, d. l. ( 2007 ), “ monetary policy and asset prices ”, monetary policy : a journey from theory to practice, ecb, pp. 43 - 51. kohn, d. l. ( 2008 ), “ monetary policy and asset prices revisited ”, speech at the cato institute ’ s twenty - sixth annual monetary policy conference. lombardo, g. and p. mcadam ( 2009 ), “ financial market frictions in a small open economy for the euro area ”, mimeo, ecb. ravenna, f. and c. walsh ( 2006 ), “ optimal monetary policy with the cost channel ”, journal of monetary economics, 53, pp. 199 - 216. trichet, j. c. ( 2009 ), “ credible alertness revisited ”, intervention at the symposium on “ financial stability and macroeconomic policy ” sponsored by the federal reserve bank of kansas city, jackson hole, wyoming, 22 august. white, w. ( 2008 ), “ should monetary policy lean against credit bubbles or clean up afterwards? ”, mimeo. woodford, m. ( 2003 ), interest and prices : foundations of a theory of monetary policy, princeton university press.