time is that the horizon for action depends on the nature of the shock. this viewpoint is correct, as far as it goes. central banks do typically refrain from reacting to supply shocks that have opposing effects on output and inflation, so as not to overreact and reinforce the effect on growth, in either direction. and that might even be the case when faced with a succession of supply shocks, such as the steep falls in oil prices we have experienced recently. each shock should in principle have a short duration and should not have a persistent effect on inflation. however, since there is always a backward - looking component in inflation developments, the longer inflation stays too low, the greater the risk that inflation does not return automatically to target. specifically, if agents start to look at the track record of recent inflation, rather than the inflation objective, it affects their benchmarks for wage and price setting decisions. what happens then is that low inflation feeds into inflation expectations and creates second - round effects. in that situation, even what began as a positive supply shock can turn into a negative demand shock. as inflation expectations fall, it pushes up real interest rates, producing an unwarranted monetary tightening. and the unexpected low inflation raises real debt burdens, which has a negative effect on aggregate demand due to the different propensities to consume and invest of borrowers and lenders. output and inflation, then move again in the same direction – but this time downwards. for that reason, in a context of prolonged low inflation, monetary policy cannot be relaxed about a succession of supply shocks. adopting a wait - and - see attitude and extending the policy horizon brings with it risks : namely a lasting de - anchoring of expectations leading to persistently weaker inflation. and if that were to happen, we would need a much more accommodative monetary policy to reverse it. seen from that perspective, the risks of acting too late outweigh the risks of acting too early. in sum, even when faced with protracted global shocks, it is still monetary policy that determines medium - term price stability. if we do not “ surrender ” to low inflation – and we certainly do not – in the steady state it will return to levels consistent with our objective. if on the other hand we capitulate to “ inexorable disinflationary forces ”, or invoke long periods of transition for inflation to come down, we will in fact only perpetuate disinflation

within the eu have, on average, half the home bias of conventional bonds. so we have a real opportunity to build a genuinely european capital market from the outset. that ’ s why, in my view, specific initiatives under the cmu action plan should be fast - tracked – even if they are only applied to sustainable finance for now. we need proper european supervision of green financial products with official eu seals, such as the forthcoming eu green bond standard. we need harmonised tax treatment of investments in sustainable finance products to prevent green investments fragmenting along national lines. and we need further convergence in the efficiency of national insolvency frameworks, which may even entail carving out special procedures for green finance. if we succeed, it would not only accelerate the transformation of our economy, but also act as an engine for the cmu project generally, testing and putting in place some of the measures that are needed to advance wider capital market integration. this double dividend is, to my mind, too good an opportunity to pass up. institutional change in europe often takes longer than we expect. but let ’ s show that, once we are committed, this change can happen faster than we ever thought possible. 2 / 2 bis central bankers'speeches