council makes an assessment of risks to price stability on the basis of both an economic analysis and a monetary analysis. the economic analysis focuses mainly on the assessment of current economic and financial developments from the perspective of the interplay between supply and demand in the goods, services and factor markets. the monetary analysis serves as a means of cross - checking, from a medium to a long - term perspective, the short to medium - term indications coming from the economic analysis. using the information derived from these analyses, the governing council decides on a level of key ecb interest rates that will serve the maintenance of price stability over the medium term. the ecb executive board is charged with the responsibility of implementing these decisions. to do so, it has at its disposal a set of instruments and procedures that are used to achieve the interest level set by the governing council at the very short end of the money market yield curve. a key element of this process is the conduct of the so - called liquidity policy. through managing liquidity, the ecb can, as the monopoly supplier of central bank money, determine the amount of funds supplied to the banking system. more precisely, the governing council sets the minimum bid rate for the most important refinancing operations, the eurosystem ’ s main refinancing operations ( mros ) that are executed through tenders. this is the most familiar of the ecb key rates. it represents a floor for the price of central bank liquidity at the tenders and constitutes the main signal of the ecb ’ s monetary policy stance. the mros provide the bulk of liquidity to the financial sector – against collateral, on a reverse basis and for a maturity of one week. there are also longerterm refinancing operations ( ltros ) that have a maturity of three months, although the ecb acts as a price taker in these operations, consciously avoiding sending any monetary policy signal. in addition to these regular operations, the eurosystem also provides the opportunity to have recourse to the standing facilities with an overnight maturity on a daily basis, although at lower / higher rates than the minimum bid rate, in order to restrict volatility in the money market. 1 the orderly functioning of the money market is of the utmost importance for the transmission of the key policy rates to the economy in general and the price level in particular. market participants form expectations about the future path of the very short - term rates based on anticipated monetary policy decisions

behaviour – reflecting underlying trust, confidence and transparency over which the ecb exerts little direct influence – are the prerequisites for a well functioning market. • second, while the ecb has made a contribution to the smooth functioning of the money market during the recent turmoil, there is a need for market participants and supervisory authorities to address the roots of the current mistrust among participants. market participants must recognise that the central bank cannot solve the underlying problems. however, the ecb will continue to pay great attention to developments in the financial markets over the period to come. • third, given the continued uncertainty surrounding the conjunctural situation – which derives from recent financial market volatility and re - pricing of risk – further additional information is needed in order to draw conclusions about monetary policy actions. this notwithstanding, it is crystal clear that recognition of the benefits of gathering further information does not imply that monetary policy does not remain resolutely focused on the maintenance of price stability and remains ready to act in a firm and timely manner to address the strengthening of upward pressures and risks to the outlook for price stability. bibliography allen, f. and gale, d. ( 2007a ), “ understanding financial crises ”, clarendon lecture series in finance, oxford : oxford university press. baker, m., and stein j. c. ( 2004 ) : “ market liquidity as a sentiment indicator ”, journal of financial markets, vol. 7, issue 3, pages 271 - 299. blinder, a. ( 1998 ) : central banking in theory and practice, mit press, cambridge, ma. durre, a., s. evjen, r. pilegaard ( 2003 ), estimating risk premia in the euro area money markets, ecb working paper, n°221. durre, a. ( 2006 ), “ the liquidity premium in the money market : a comparison of the german mark period and the euro area ”, german economic review, vol. 7 ( 2 ), pp. 163 - 187. ecb ( 2002 ) : “ transparency in the monetary policy of the ecb ”, monthly bulletin, november. ecb ( 2004 ) : “ the monetary policy of the ecb ”. ecb ( 2005 ), “ the implementation of monetary policy in the euro area – general documentation on eurosystem monetary policy instruments and procedures ” ecb ( 2007 ), “ euro money market study 2006 ”. friedman,