expansion of the list of eligible assets. others have already been discontinued, such as the provision of non - euro liquidity via swap lines with a number of other central banks, including the federal reserve. these operations have been discontinued against the background of improved functioning of financial markets over the past year and limited demand. moreover, going back to a governing council decision already taken last december, the number and frequency of longer - term refinancing operations is gradually being scaled back. in particular, the last one - year operation was conducted in december 2009, and one final six - month operation with full allotment will be conducted next month. further decisions on the gradual phasing - out of those non - standard measures that are not needed to the same extent as in the past will be announced in the coming months. the decision to initiate the gradual phasing - out of these measures reflects improvements observed in financial conditions. money markets are performing better, and the past reductions in the ecb ’ s key policy rates are increasingly reflected in the interest rates on bank loans to households and corporations. this indicates that the monetary policy transmission process is broadly functioning. looking forward, it goes without saying that the overriding concern for the ecb ’ s monetary exit considerations is the primary objective of price stability to be maintained over the medium term. from this perspective, i would like to stress that the operational framework with its interest rate corridor is flexible, allowing control over interest rates even without the phasing - out of all non standard measures. in other words, the governing council is free to choose the way in which interest rate action is combined with the unwinding of the remaining non - standard measures. fiscal policy what about fiscal policy? i think it is fair to say that the “ fiscal exit ” – or i think it is better to say “ fiscal adjustment ” that will be necessary in the coming years is likely to prove even more challenging for governments than the phasing out of non - standard measures for the eurosystem. during the crisis, governments were right to allow deficits to expand so that fiscal policy provided support to the economy in the short run. but now, government deficits are high – and indeed very high in many countries ; government debt - to - gdp ratios are mostly high and rising ; and the attention of financial markets is increasingly turning to issues of government solvency. in this context, it is of some comfort that – in part thanks to the european fiscal framework –

, defined as one that can maintain control of some short - term interest rate. michael woodford ( 2001 ) considers this problem ( or at least a closely related problem ) in a paper presented at the most recent federal reserve bank of kansas city jackson hole conference. he convincingly argues that monetary policy could still maintain control over interest rates - - provided that the central bank can pay interest on the deposit balances it offers. for some reasons, however, such a system might not work quite as well in the united states as in other countries. the stigma against borrowing from the fed is entrenched in the united states. it is not clear whether or to what extent that stigma would be overcome with the introduction of a lombard facility. in recent testimony, the federal reserve opened the possibility that the required reserve ratio could be reduced over time and that reserve requirements could even be ultimately eliminated. see meyer ( 2001 ). specifically, if the fed were allowed to offer interest on reserve balances, the demand for voluntary reserve balances to facilitate settlements across banks could rise. today some banks voluntarily hold operating balances, above the level of their required reserves, to facilitate settlements. these balances pay implicit interest, in the form of credits against priced services provided by reserve banks. but the amount of priced services purchased by a bank limits the amount of balances on which it can make use of implicit interest. payment of explicit interest might permit the fed to ensure a high enough level of voluntary reserves to avoid undesirable volatility of the federal funds rate with a lower required reserve ratio or, in principle, without any reserve requirement. the central bank can conduct monetary policy in this case by setting an interest rate on balances held at the central bank. banks cannot pay a rate on interbank deposits lower than the rate offered on the balances banks could hold at the central bank. otherwise, banks would convert their interbank deposits into central bank balances. banks have no incentive to offer a rate on interbank deposits higher than the rate offered by the central bank because they would experience a loss as other banks give them low - yielding central bank liabilities in exchange for their high - rate interbank deposits. the minimum requirement for an effective monetary policy is, therefore, the ability of the central bank to set an interest rate on balances held by banks with the central bank. woodford does not address the possibility that banks might not have a positive demand for central bank balances. even in this case