more than usd 1, 100 billion in the summer of 2007 to below usd 900 billion in october. the problems then spread to the banking sector. the complex structure of some derivative instruments made it extremely difficult to assess the risk exposure of individual market participants. it became evident, however, that a smaller proportion than expected had been sold to non - banks. as there was not enough information on what risks were on counterparties ’ books, interbank lending pretty much dried up. it was indeed surprising how the crisis then spread into the money market, making rates soar. yield spreads between secured and unsecured interbank lending demonstrated the uncertainty prevailing in the markets. while the spread between uslibor and usrepo had mostly staid below 20 basis points before the turmoil, it exceeded 130 at the end of august 2007. the interplay of different types of risks – counterparty, funding liquidity, credit risk – led to strong dynamics, which reinforced each other. the market liquidity of certain instruments was affected as well. large parts of the credit market dried up. risk premia increased sharply and we saw substantial deleveraging. equity markets also fell sharply, but were quick to recover. provision of liquidity by the ecb and other central banks have helped to reduce tensions in the financial system. however, we still face uncertainty. there might be more delinquencies of us homeowners over the coming quarters, and we do not know when the adjustment process in the us real estate markets will come to an end. moreover, the situation in money markets has not completely returned to normal. the funding of the interbank market continues to be hampered by liquidity concerns and a lack of confidence with regard to potential counterparties. with the increase of risk premia in the international corporate loan markets, a period of extremely favourable financing conditions has come to an end. in the credit risk transfer markets, we shall probably see a longer adjustment process, during which complex financial instruments need to be repriced. it is striking that emerging markets seem to have been affected less than industrial countries and have emerged from the turbulence in remarkably strong shape. their risk premia only went up for a rather short period. emerging markets have not always been so resilient. in previous financial crises these countries were often hit particularly hard. i believe that it is still essential to enhance market forces and the efficiency of local currency bond markets in emerging economies. these have proved to be one of the main vehicles for

axel a weber : challenges for monetary policy in emu text of the homer jones memorial lecture by professor axel a weber, president of the deutsche bundesbank, at the federal reserve bank of st louis, st louis, 13 april 2011. * 1. * * introduction president bullard ladies and gentlemen first of all, let me thank you for the opportunity to speak here today. it is a real pleasure and a great honour for me to give this year ’ s homer jones memorial lecture, all the more so as this lecture series is named for such a prominent monetary economist. in his capacity as research director and senior vice - president of the st. louis fed, homer jones played a significant role in shaping this institution ’ s monetarist reputation. four years ago, i was invited to give a speech in paris. its title − “ from academic to policymaker ” − referred to the fact that i started out as an academic. 1 i began that speech by mentioning a number of other academics who went on to become central bankers : mervyn king, ben bernanke, janet yellen, bill poole and otmar issing, to name but a few. i continued by analysing why there are so many academics in monetary policy. james bullard, by the way, is another case in point, whom i did not mention at the time because he was not yet in his current position. one of the main reasons why, over the past years, academic researchers have been taking up leading positions at central banks is that monetary policy itself has been heavily influenced by the findings of academic research. during the financial crisis, monetary policy and economies across the world have benefited significantly from these insights, since they have helped us to swiftly apply the appropriate policy responses to contain the crisis. conversely, the crisis has also raised important issues for academic research, in monetary economics as well as in other fields. as of next month, after seven years as a policymaker, i shall be taking up the position of a faculty member of the university of chicago booth school. in spite of this upcoming transition “ from policymaker to academic ”, my remarks today on the challenges for monetary policy in emu will be given from the policymaker ’ s perspective. 2. the financial crisis and its lessons for monetary policy the crisis has brought the “ monetary policy consensus ” formed in the years prior to the crisis under scrutiny. 2 the framework of monetary policy differed significantly from one central bank to another. nevertheless, across the