luigi federico signorini : policy and regulatory issues confronting the current global economic and financial environment keynote address by mr luigi federico signorini, deputy governor of the bank of italy, at the international finance corporation, 7th annual global trade partners meeting, milan, 17 february 2016. * * * ladies and gentlemen, thank you for inviting me to this important conference. trade is key to prosperity and finance is key to the development of trade. the role that monetary policy and financial regulation play in ensuring a stable and efficient financial environment is therefore, i believe, of interest to this audience. without any pretence of generality, in my speech i shall take up a selection of policy and regulatory issues confronting the global economic and financial environment at the moment and discuss briefly the policy response and agenda. inflation low inflation remains a challenge, in the euro area and beyond. we in the eurosystem take this risk very seriously. the adverse effects of a long period of low inflation are well known. when the economy is at the lower bound of nominal interest rates, the room for conventional monetary policy shrinks. since debt contracts are fixed in nominal terms, a fall in inflation increases the ex - post real debt burden for borrowers ; with long - dated debt this effect may persist for years. with very low inflation even otherwise favourable supply shocks, like the effects of increased supply on fuel prices, may not be an unmixed blessing. research at the bank of italy has shown that, when the zero lower bound is binding, even a negative cost - push shock may generate a negative and protracted decline in output. 1 a protracted period of low inflation and a string of negative inflation surprises increase the risk of de - anchoring of long - run inflation expectations. a symptom of this risk is the tendency of long - term inflation expectations to move together with short - term expectations. some of the studies we have conducted at the bank of italy show that this risk is material, but also that it can be countered : 2 the correlation of long - and short - term expectations in the euro area has increased, but the announcements of monetary policy measures have had a perceptible impact in weakening this correlation. the aim of the decisions taken by the governing council of the ecb is to counter the risk of persistent downward pressures in prices. our assessment is that the effects of the asset purchase programme ( app ) on financial markets and on the real economy, in the euro area and in italy, have

transformation, such as some alignment of redemption rules with the asset classes the fund is allowed to invest in ( italy has some such regulations in place ). authorities should also consider whether and how to incorporate investment funds into system - wide stress testing exercises, to form a view on how funds ’ selling impacts the market and how this in turn feeds back into funds ’ asset price declines and further redemptions. finally, data gaps ( concerning e. g. investment funds ’ leverage, liquidity and maturity transformation ) should be addressed ; in awareness of this, the bank of italy is contributing to the data gap initiative launched by the g20 finance ministers and central bank governors in october 2009 and expanded in 2015. capital flows in emerging market economies the final point i would like to touch on concerns the risk of capital flow reversals in emerging market economies ( emes ), a risk that is frequently mentioned in the flagship reports of the international financial institutions and deserves attention. two main developments have, in my view, contributed to the evolution of this risk in the last decade. first, global factors have assumed an increasing role as driver of capital flows towards emes. it is now largely accepted that major capital flow episodes ( surges, sudden stops, flights, retrenchments ) can be associated with the evolution of global factors ( i. e. global risk aversion, global interest rates, global growth ). 7 recently, the imf8 has provided a thorough analysis of the mechanisms driving the strong increase in the corporate debt of non - financial firms across major emes. one of the points emphasised by the imf ’ s analysis – based on micro data – is forbes and warnock, 2012. rey ( 2013 ) highlights the co - movements of different classes of capital flows with global factors. imf, 2015a. bis central bankers ’ speeches that firm and country specific characteristics appear to have become less and less relevant, compared with global factors, in explaining leverage growth, issuance and spreads in emerging markets. second, the composition of capital flows towards emes has changed. while, up to a few years ago, cross - border banking flows were the main driver of the increase in capital flows towards emes, more recently portfolio flows have grown in importance. low yields in advanced economies ( aes ) have spurred an extensive search for yield. an increasing fraction of global capital has been allocated to governments and corporations in emes, with large inflows into cyclical sectors like mining and