##ation beyond inflation stabilisation is at risk of succumbing to the temptation of fine - tuning. an element of the so - called “ jackson hole consensus ” was that monetary policy should play a key role in the management of aggregate demand in the short term, whereas fiscal policy was viewed as an inappropriate instrument, mainly because of decision and implementation lags embedded in the policy process. i would argue that we should not overestimate the potency of either policy. before the crisis there was a common misperception that monetary policy could focus more on demand management because inflation was durably under control. proponents of this view found apparent vindication in the phenomenon of the “ great moderation ” observed in the 20 years before the crisis. however, there were clear warnings that the short - term orientation could have negative side effects in the medium to long term. 5 as we now know, the side effects manifested themselves in a spectacular build - up of monetary and financial imbalances. the sudden unwinding of these imbalances marked the beginning of the current crisis. although monetary policy frameworks oriented more towards the medium term could probably not have completely prevented the current crisis, i am convinced that they would have helped to make it less disruptive. the then dominant theoretical framework suggested otherwise. the new keynesian model generated policy prescriptions which assigned the central bank the task of stabilising inflation and output developments at short horizons and in quite precise terms. these prescriptions have shaped the inflation - targeting policy advice to a non - negligible extent. let me emphasise, though, that many inflation - targeting central banks retain a considerable degree of flexibility when putting this advice into practice – although in a very different way from the meaning the term “ flexibility ” has received in theoretical work. i will return to this point shortly. simplifying, the inflation - targeting policy advice can be articulated in three main precepts : first, look at inflation forecasts and output gap forecasts as summary statistics of the state of the economy. second, rely on your best model of the economy, even if it does not integrate or just assigns a trivial role to a host of variables, particularly money and credit, which are assumed to adjust to the state of the economy. third, follow the best policy implied by the model and set the policy instrument so that inflation forecasts – whatever the nature of the shocks that might have caused them – are stabilised, and output volatility is

further reduce the amount of duration risk that is borne by investors, contributing to a compression of term premia. as of the end of 2019, the net asset purchases and reinvestment policy had already led to the withdrawal of substantial duration risk from the market, in the order of 19 percent of the duration - equivalent stock of outstanding public debt in the four largest euro area economies. this is foreseen to increase to 27 percent by the end of the second quarter of 2021, taking into account the june policy decisions and the expected supply of bonds entailed in the eurosystem staff macroeconomic projections ( chart 6 ). chart 6 outstanding quantity of duration : holdings of eurosystem ( pspp and pepp ) and other investors https : / / www. ecb. europa. eu / press / key / date / 2020 / html / ecb. sp200624 ~ d102335222. en. html 5 / 13 7 / 15 / 2020 the ecb ’ s monetary policy response to the pandemic : liquidity, stabilisation and supporting the recovery ( left panel : eur billions ten - year equivalents ; right panel : percentages ) sources : securities holdings statistics, government finance statistics, ecb and ecb calculations. notes : the chart shows the stock of debt securities issued by each general government of the four largest euro area jurisdictions, and the amounts of that stock held by the eurosystem ( under the pspp and pepp ) and other investors in terms of ten - year equivalents. “ other investors ” comprise all other financial and non - financial investors. solid columns ( lines ) denote historical data and patterned columns ( dotted lines ) denote forecasts. the latest observations are for 2020q1 ( historical data ) and 2021q2 ( projected data ). the pepp and the scaling - up of the asset purchase programme are estimated to reduce the ten - year sovereign term premium by almost 45 basis points ( chart 7 ). this adds to the nearly 100 basis point compression in the term premium that is attributable to the sizeable stock of assets purchased under the app in recent years and the september 2019 recalibration of the app. these are likely to be conservative estimates of the impact of the march and june 2020 asset purchase decisions on euro area sovereign yields, since these estimates are based on elasticities of yields to asset purchases estimated from the public sector purchase programme ( pspp ). in fact, event