and a term premium. the expectations component reflects the average of current and future expected short - term rates over the maturity of the bond. if the pure expectations hypothesis of the term structure were to hold, this would be all that mattered in terms of explaining movements in long - term rates. but broad empirical evidence suggests that the pure expectations hypothesis fails to hold true in practice, and that there is indeed a time - varying premium that investors require in order to hold a 1 / 6 bis central bankers'speeches long - term bond instead of simply rolling over a series of short - term bonds. 4 monetary policy – and there we are increasingly certain – cannot only influence the expectations component, but also the term premium. three examples demonstrate this more clearly. first, by changing our key policy rates, we can directly impact the short end of the curve – the footing of the expectations component. in normal times, medium to long - term rates would adjust to the extent that market participants would see a change in policy rates as the beginning of an incremental series of changes. but with short - term policy rates approaching levels closer to zero during the early phases of the most recent easing cycle, this channel had become less effective. markets – in the belief that rates could not enter negative territory – stopped short of pricing in the degree of accommodation they would normally have expected in the face of downside risks to our price stability mandate. our decision in june 2014 to introduce negative deposit facility rates restored our ability to steer market expectations and thereby also medium to long - term rates. indeed, by signalling to the market that policy rates could go below zero, we ultimately succeeded in shifting downwards the entire distribution of future expected short - term rates, thereby providing important additional accommodation. 5 second, and related, by communicating about where we see the economy heading, and by clarifying our ‘ reaction function ’ – that is, by providing forward guidance – we can directly influence expectations regarding future short - term rates. forward guidance has served us well and has contributed to keeping the short to medium end of the yield curve well anchored at times when external shocks were threatening to unduly tighten financial conditions. i will come back to this in a minute. but to the extent that forward guidance reduced uncertainty about the future path of interest rates, it has not only affected the expectations component but also the term premium. yet, the main channel through which we – and other major central banks – have recently exerted measurable downward pressure on the term premium,

main objectives of this series of conferences is to discuss the main lessons for public policies arising from developments in the international banking and financial sector. the continuation of the market turmoil does not allow me to talk to you with the benefit of detachment and the comfort of an ex - post assessment. however, i should like to take advantage of the occasion to share with you some considerations on the ecb ’ s response to the market turmoil drawing on the experience of the past year. i am very grateful to cornelia holthausen for her valuable contributions. 2. the separation between monetary policy formulation and its implementation central bankers have, naturally, eyed the developments of the past year of financial turmoil – and, particularly, their recent intensification – with great concern, as they have the potential to influence adversely the ability of central banks to steer monetary policy rates, affect the transmission mechanism of monetary policy and, more generally, may pose a threat to financial stability. once the credit concerns that had built up in the sub - prime mortgage market segment started to affect interest rates and traded volumes in the euro area money market, the ecb responded to these highly unusual market events by timely and forcefully adjusting its liquidity policy. i will not deal with the specificities of the ecb ’ s liquidity management over the past year – this will be carried out by the ecb staff in tomorrow ’ s session on “ the experience with crisis management ” – but i would like to stress one fundamental principle underlying our response to the turmoil : “ the separation principle ”. this principle relates to the dichotomy between the ecb ’ s monetary policy and its liquidity policy or, in other words, between the formulation and implementation of monetary policy. during the turmoil, the separation principle proved to be very effective. supported by the flexibility of its operational framework, the ecb was able to react in a flexible and quick manner to a changing market environment, and it allowed the steering of interest rates close to the policy rate by means of temporary quantity adjustments, albeit without increasing the aggregate supply of euro liquidity to the banking sector. the main objective of the ecb ’ s immediate and lasting responses to tensions in the money market was to keep under to control the very short - term interest rates as the first step in the transmission of monetary policy. broadly speaking, the ecb ’ s liquidity policy response consisted of three elements : first, it changed the timing of the liquidity provision within the maintenance period ( the so -