##ing has increased. the rise in overnight deposits is in part a mechanical effect of asset purchases, which increase deposit holdings of those selling bonds to the eurosystem. it also reflects the long period of very low interest rates that sharply reduced the opportunity costs of holding “ money - like ” claims. both of these effects can be expected to reverse as we remove monetary policy accommodation. when we last increased interest rates, from 2005 until mid - 2008, overnight deposits as a share of total deposits fell by about seven percentage points as firms and households shifted savings into less fungible term deposits that earn a higher rate of remuneration, a development that started only recently in the current hiking cycle ( slide 11, right - hand side ). however, even if funding became more stable again over time, banks would be likely to want to hold larger liquidity buffers to meet potential outflows. [ 16 ] and they would want to hold such buffers, at least in part, in central bank reserves as these do not need to be liquidated and, unlike marketable safe and liquid assets, are not subject to valuation changes. the current environment vividly demonstrates that such valuation changes can be a source of instability for banks and markets. steering interest rates when the demand for reserves is uncertain these developments do not necessarily suggest that a return to the pre - 2008 corridor framework is undesirable or infeasible. after all, reserve demand may become more predictable over time and balance sheet run - down will increase the availability of marketable hqla which banks can use to comply with their regulatory requirements. but they do suggest that it may have become more difficult for central banks to correctly anticipate the demand for reserves and hence to steer interest rates in a wide corridor, and that such steering would entail a higher operational burden, both for the central bank and the banking system at large, with the need for more frequent fine - tuning operations. what, then, might be the alternatives to the pre - 2008 corridor framework? the recent experience of other major central banks suggests that policymakers have two broad options : one is to formally adopt the current floor system by maintaining a sufficiently large bond portfolio on the asset side ; the other is to offer, either in a floor or a narrow - corridor framework, regular collateralised lending operations that ensure that banks are able to maintain their desired level of reserve holdings as balance sheet reduction proceeds. while both options can be expected to have a similar capacity to maintain control

will be affected in different ways by monetary policy easing. this observation has led some people to draw hasty conclusions on the effects of monetary policy on inequality. under benjamin ’ s framework, however, the savers versus borrowers split is only one of the many dimensions of heterogeneity which characterise the data. other important dimensions are related to households ’ holdings of liquid assets and their ability to borrow, both of which enable them to absorb the impact of temporary income shocks. in addition, the borrowers versus savers difference is not crucially important if the indirect channel plays a dominant role in the transmission of monetary policy. the framework ’ s capacity to model interactions between heterogeneous households and the macroeconomy in the way i have just described hinges on benjamin ’ s innovative and extensive work on mathematical and computational methods to solve models in continuous time. as these techniques have substantially enhanced the set of economic problems that we are able to address, we are now able to rapidly solve and analyse models that have realistic and quantitatively important features, such as illiquid assets and adjustment costs. in addition to analysing the monetary transmission mechanism, the continuous - time solution techniques benjamin pioneered can be used to study a wide range of economic questions. for example, benjamin and his co - authors2 recently investigated which theories can explain the substantial rise in inequality in the top tail of the us income distribution in the 1980s and 1990s. while most established theories have difficulties in accounting for this development, theories allowing for “ superstar ” phenomena are consistent with it. superstar phenomena arise, for example, when changes in technology make it possible for entrepreneurs or managers who are a little better than others at any given task to capture a much higher share of the market and of income. i have spent much of my time today talking about the aspects of benjamin ’ s work that are particularly relevant for monetary policy. however, he has expanded our knowledge in an impressive range of other areas which i did not have time to discuss, including determinants of incomes across countries, the allocation of resources, human capital accumulation, and saving and wealth inequality. please join me in congratulating benjamin on receiving the 2018 bernacer prize. benjamin, i wish you continued success and look forward to following your future work. 2 / 3 bis central bankers'speeches 1 for a seminal contribution to this topic, see : kaplan, g., moll, b. and violante, g. l. ( 2018 )