academic scribbler from a few years back ”. 5 economic theories, some of them dating back to the 1930s, 6 have helped us to incorporate financial insights tractably into our models – think of the financial accelerator, the debt deflation channel, the credit channel, the modelling of collateral - constrained and creditconstrained agents, to name but a few. therefore, saying that models had nothing to teach us about the crisis ( before or after ) is just not right. it ’ s true that we did not avoid the great recession, but if we, around the world, were able to prevent a much more damaging depression, we owe much of it to the science of economics. nevertheless, it is also true that our models did not predict the crisis and provided only limited policy guidance when it struck. can we identify their weaknesses? well, there are the usual suspects : linearity, rational expectations, complete markets, limited agent heterogeneity and financial imperfections. ex ante, these choices may be defended as reflecting the need for parsimony, logical consistency and tractability in model building ; perhaps also the view that financial crises were rare. clearly, those views need revising. certainly, structural models were not very successful at forecasting the crisis. but i ’ m not certain that there were other tools out there which did better. non - linear models are outwardly attractive – think of the strong pro - cyclical features of the current euro area crisis, such as the market impact of credit downgrades or the feedback loop between sovereign and bank creditworthiness. but they do not necessarily deliver substantive gains in real time. 7 meta models or models which markedly over - fit the data are unlikely to help policy deliberations. arguably of more importance is the better identification of those ( currently under - developed ) financial factors that matter for our short - term assessment. let me now bring the ecb ’ s experience into the discussion. i would first like to emphasise the valuable contribution that the current generation of dsge models have made to the policy - making process. the ecb has been at the frontier of developing and estimating structural models for policy analysis. models such as smets - wouters8 and the new areawide model9 ( nawm ) have played an important role in policy analysis ( for example, in policy - making under the zero lower bound for nominal interest rates and the effectiveness of keynes j. m. ( 1936 )

is important for the ecb, as they affect the transmission of our monetary policy across the euro area. they require parallel efforts on many different fronts. but a common thread is the need to enhance the contribution of the financial sector, in particular by taking significant steps towards a capital markets union in europe. integrated capital markets are at the heart of building resilience, because they encourage europeans to invest in debt and equity irrespective of home country considerations. that, in turn, helps share the costs of local recessions, because financial losses in one part of the union can 1 / 4 bis central bankers'speeches be offset by gains in another. scale and depth matter, as does a common regulatory framework. at present, however, financial markets are less integrated in the euro area than in other large economies. only around 20 % of shocks in the euro area were mitigated through cross - border debt and equity holdings between 1999 and 2016, compared with at least 60 % in the united states. 3 capital markets are also vital to fund the transformation of our economies. we need to see investment of around €330 billion every year by 2030 to achieve europe ’ s climate and energy targets4, and around €125 billion every year to carry out the digital transformation. 5 while banks can and should provide a good share of this funding, capital markets can provide innovative tools to close the investment gap. capital markets are better suited to financing projects with a defined purpose, directly linking investors to the impact they intend to achieve. and they are also better at drawing retail investors towards supporting transformative activities. 6 although we are making progress, thanks to the work of the commission, completing a fullyfledged cmu will take time. capital markets have developed nationally, so we first have to open them up and harmonise those markets in order to integrate them further. this begs the question : how do we deepen capital markets faster? are there market segments where fewer obstacles exist and where we can achieve high levels of integration quickly, but that also encourage the funding of future - oriented projects? developing european green capital markets to my mind, europe ’ s green capital markets meet all these criteria. green capital markets are dynamic and growing in europe, and they are already relatively well integrated. this means that as they deepen further, so will europe ’ s resilience. europe is established as the location of choice for green bond issuance, with around 60 % of all green senior unse