that have been advanced by commentators include : ( i ) the excessive borrowing by financial industry and the private sector due to the prevailing low interest rates ; ( ii ) the build up of financial disequilibria and asset price bubbles ; ( iii ) the biased system of incentives that led investors to excessive risk - taking ; ( iv ) the failure by regulators to adapt to the state of the evolution of the financial system ; ( v ) the market failures related to information asymmetry and lack of transparency about risks and characteristics of the different products ; ( vi ) the existence of obvious conflicts of interests affecting key agents needed in the securitisation process ; and ( vii ) finally, the failure of investors to conduct due diligence, blindly relying on information and models that proved to be inappropriate to capture some very relevant risks. it is probably not very adventurous to say that the bursting of the house price bubble in the us, with the ensuing increase in the default rate and the severe underperformance of the subprime mortgage sector, was the spark that ignited the financial and economic crisis. in the summer of 2007, as highly leveraged investors were forced to unwind some positions to cover margin calls, liquidity in some fixed - income markets dried out completely. investors found themselves trapped and were forced to sell assets at considerable discounts. in some cases further sales – particularly for subprime mortgage backed securities – were forced by stop - losses and value - at - risk based risk budgets. liquidity risk - related losses piled up over losses registered as a result of fair value accounting as risks in the real estate sector started to materialise on a scale unseen since the great depression. in the absence of asset liquidity and with many of the main actors in financial markets undergoing painful processes of loss - recognition, consolidation and deleveraging, some of the assumptions of the models regularly used for risk management did not hold anymore. for bis central bankers ’ speeches instance, this was the case of the assumptions of price continuity and sufficient arbitraging activity that underlie proper market functioning. furthermore, a variety of assets had to be priced using models that were over - reliant on assumptions and inputs such as credit ratings that had come under strain, thereby increasing the scope for model risk. as a result, uncertainty about the “ true ” fair value of the assets being held by financial institutions increased significantly. as if the discovery of these “ forgotten ” risks – the liquidity risk as well

banca d ’ italia and suerf workshop ‘ the effectiveness of monetary policy in a low interest rate environment ’ welcome address by daniele franco senior deputy governor of the bank of italy rome, 18 november 2020 i am happy to welcome you all to the banca d ’ italia and suerf ’ s joint workshop on ‘ the effectiveness of monetary policy in a low interest rate environment ’. as you may know, we had scheduled this workshop to take place in june, but we had to postpone it, because of the pandemic. we also had to move to a virtual setting and rely on video connections. the workshop addresses issues that are now at the top of policymakers ’ agendas around the world. the pandemic has led to the worst recession in recent history, and the scars that it will leave on the global economy are likely to prolong the low interest rate environment. monetary policy is playing a key role in supporting the recovery and its contribution will remain fundamental in the coming years. the discussion on strategies, targets and tools remains open. today and tomorrow, we will have the opportunity to embark on a wide - ranging debate on the challenges ahead. in my remarks today, i will touch upon a few of them. to begin with, i think we can all agree that the pandemic crisis has further exacerbated the effects of some ongoing long - term trends. some of these trends have already been in place since the great financial crisis and its aftermath. i am mostly referring to the drop in the natural rate of interest1 and to the subdued inflation dynamics. these trends are due to structural changes in macroeconomic relationships and imply a need both to reassess theoretical frameworks and to review the monetary policy strategy and tools. in this respect, the first session deals with monetary policy strategy in such a low interest rate environment. this of course calls into question the issue of the appropriateness of the current inflation target, which is indeed one of the main items on the table in see ex multis neri, s. and gerali, a. ( 2019 ), ‘ natural rates across the atlantic ’, journal of macroeconomics, 62. the eurosystem ’ s monetary policy strategy review. i will not comment further on the strategy review, since it is still ongoing. another important theme in the “ post - pandemic ” environment will be the interaction between fiscal and monetary policy. as we know, fiscal policy worldwide was boldly expansionary