economy. and so qe was born. since then the economy has stabilised, household and business confidence have recovered, and financial market conditions have improved. taken at face value, the extraordinary policy measures implemented by the bank, alongside those enacted by the government, appear to have been successful in averting a deeper and more severe recession. and the hope now is that a sustained recovery in demand will follow consistent with the objectives of those polices. but the contribution of our asset purchases in bringing about this stabilisation is still an open question. one year on, what have we learnt about qe? today, i will address three key questions. what is the theoretical foundation for such a policy? what are the key channels of transmission? and what can we say about its impact to date? these questions are critical for the operation of monetary policy. but they are equally important for the study of monetary policy. the financial crisis posed questions which the models most commonly used to analyse monetary policy were not well suited to answer. there is an emerging literature that responds to these shortcomings. it is important – both for the theory and practice of monetary policy – that this continues. the theoretical foundation for unconventional monetary policy let me turn first to the theoretical foundation for quantitative easing. over the past 15 years, the canonical new - keynesian new classical synthesis model has become the benchmark for economists to study the operation of monetary policy. the attraction of this class of models, as typified for example by woodford ( 2003 ) and walsh ( 2003 ), is that its relative simplicity and tractability means that it can be used to derive clear and precise policy prescriptions. and indeed that is the case when used to analyse monetary policy at the zero bound. the only way policy can gain traction at the lower bound in such a model is through influencing expectations – the most well known reference here being eggertsson and woodford ( 2003 ). this result stems from the fact that the economy behaves as if, in effect, there are only two assets in existence, typically modelled as money and bonds. agents hold more money up to the point at which the marginal benefit from the liquidity services it confers equals the marginal cost : the nominal interest rate. at the zero bound, both the marginal benefit and marginal cost are effectively zero, and money and bonds become perfect substitutes. it follows that exchanging money for bonds at this point has no impact on activity or inflation. the economy is assumed –

in line with the recommendations recently made by the european council for all european countries in the framework of the review of governance in europe. a key element of the budgetary stability law for achieving fiscal discipline is transparency. the dissemination of data relating to the non - financial activity of the state is abundant, detailed and released with a relatively small lag. this is regrettably not the case for regional or local governments, which curtails the ability to control their activity in time and accountability. in my view, these shortcomings must urgently be redressed. at a time such as the present, a lack of transparency may lead to a lack of market confidence that takes the form of a further premium on the cost of financing. given the circumstances, all available instruments should be used to ensure compliance with the targets set. in particular, authorisation for regional and local governments to issue new debt should be conditional upon compliance with consolidation plans. a spending ceiling might even be considered for these governments, an instrument which has proven enormously useful in strengthening budgetary discipline in the case of the state. along the same lines, medium - term planning necessitating analysis of the structural dynamics of the various public revenue and spending items and enabling those areas where the scope for rationalisation and adjustment are greater to be detected may prove appropriate, especially when adjustment measures going beyond a temporary correction of imbalances are required. in this setting, the reform of the pension system currently under discussion is especially important. indeed, it goes beyond the major goal of ensuring the long - term sustainability of our pensions system in the face of the challenge of population ageing. this reform may also have significant and beneficial short - term effects on the credibility of the authorities ’ commitment to budgetary discipline and the ability to see through far - reaching structural reforms and favourably influence the risk premia on public debt. the promptness and ambitiousness of the reform are essential. a suitable combination of changes in certain parameters of the system, raising the legal retirement age, the minimum number of years necessary to qualify for a pension and the period over which the pension is calculated would help ease substantially the pressure on future public spending on pensions and resolve one of the spanish economy ’ s major outstanding problems. fiscal consolidation is an essential condition for ensuring future economic growth. the effort will no doubt be rewarded because it will place the spanish economy in a sounder position to anchor the recovery. its long - term effects will in any event prove more forceful if accompanied by