, that between monetary policy and fiscal policy. in a financial crisis which is partly derived from excessive public debt, monetary policy should avoid covering the liabilities of fiscal policy and printing money to finance the public debt, thereby coming to the aid of the fiscal authorities and allowing them to postpone the adjustment – again a problem of moral hazard. on the other hand, the monetary authority must avoid that liquidity problems in the government debt market will turn into solvency problems hindering the conduct of monetary policy itself. an extreme situation is one in which the central bank intervenes directly in the market for government securities and seeks to systematically influence yields. in this way the central bank actually takes away from the market the ability to assess the credit risk of public debt, turning it into an inflation risk. in a situation of low growth and low inflation, this risk tends to be undervalued by the markets. the budgetary authorities may in turn be led to believe that there is no problem of sustainability of public debt and no urgent need to take corrective measures. in fact, monetary policy takes the place of fiscal policy and over time part of the adjustment takes place through the inflation tax. the more active the central bank is in trying to influence bond yields, the less the incentive for the political authorities to take corrective budgetary measures – a sort of moral hazard in this case as well. at the other extreme is the situation in which monetary policy never intervenes in the market for government securities, even when this is subject to instability. in other words, a situation arises that is similar to that in which public debt is fully denominated in foreign currency and national authorities have no chance to influence the conditions of the issuance. this is a rather unique situation, in which euro area countries find themselves. the separation between fiscal and monetary authorities is optimal if the fiscal authorities are credible and if markets work perfectly and are able to accurately assess the credit risk of each issuer. in this case the market exercises a disciplinary constraint on the public issuers, which have to come to terms with market conditions and contain the debt. there are no problems of moral hazard. bis central bankers ’ speeches the management of this rather unique system, like that which occurs in the euro area, must take into account two important aspects that distinguish theory from practice. the first is that conditions can be found in which markets do not work as the theory predicts. the second is that in advanced countries such as those in the euro area

, macroprudential policies can be effective in restraining increases in residential property prices, but they are no panacea. lending by foreign - based banks dilutes the effectiveness of capital - based measures. moreover, our current tools are bank - based and therefore exercise little control over the growing role of the non - bank financial sector in lending to households. for example, in the netherlands around a third of mortgage lending to households is now provided by pension funds, insurers and mortgage funds. given these factors, it is worth considering whether the current suite of macroprudential tools remains appropriate. capital measures, while effective at increasing bank resilience, are much less successful at leaning against excessive housing price inflation, in part due to the factors i just mentioned. loan - to - value ( ltv ) and loan - to - income ( lti ) constraints may be more effective since they act directly on borrowers and are more difficult to circumvent. indeed, these measures have proven effective in reducing housing price inflation. ltv limits increase the resilience of the household sector, reducing the risk of households finding themselves with negative equity if housing prices fall. lti limits reduce the likelihood that some households will be forced to reduce non - housing expenditure if interest rates increase. this in turn helps mitigate the potential contagion from falling house prices to a more general economic downturn. yet ltv and lti limits are themselves not without difficulties. the sharp increases in house prices and rents witnessed in recent years have made it expensive to obtain housing. insufficient housebuilding, owing to capacity constraints in the construction sector and regulatory restrictions, has exacerbated the shortage of housing. and the burden is felt most acutely by the poorest in society, who spend a larger share of their income on housing costs than richer households. while ltv and lti limits are relatively effective in slowing housing booms, they work by crowding out marginal borrowers, who are precisely those most affected by the housing shortage. ltv limits crowd out those without a large enough deposit, usually young and / or poor households, while lti limits exclude lowincome households. this distributional impact of ltv and lti limits can render their use politically controversial, and may lead to inaction bias, limiting the effective use of policy measures to counter housing price inflation. dealing with distributional issues lies beyond the remit of central banks and prudential authorities, but we