speaking, the “ fundamental ” asset price is equal to the net present value of the cash flows which the owner of the asset is entitled to receive. although it is easy to state in theory, this definition it is by no means easy to apply in practice for investors, regulators or central bankers. forming forecasts of highly uncertain cash flows that stretch far into the future is a challenge, which not only requires substantial expertise but is also subject to the great uncertainty about the future values of factors influencing the asset price. for example, in 2005 – with the information available at that time – it was hard to make an unambiguously agreeable case that high us housing prices would not be confirmed by good fundamentals in the future. although there were also warnings and some speculation on price drops. in the light of such complications, practitioners often resort to complementing fundamentals - based asset price assessments with comparing current prices with historical “ manias, crashes and panics ”. bis central bankers ’ speeches averages. if current prices exceed long - term averages by a sufficiently large margin, a warning signal is recorded that a bubble might be present and further analysis is triggered about whether it risks causing a crisis. i will come back to this later in my presentation. there are many reasons why the financial system may not value assets correctly, leading to bubbles and imbalances. investors have a tendency to look for information from the behaviour of other investors. so buying and selling “ herds ” 2 can develop in financial markets on the basis of very little genuine news. imperfections in credit markets3 can lead to boom bust cycles in money and credit quantities as well as asset prices. “ moral hazard ” could bring about excessive risk taking by financial intermediaries who try to exploit naive investors4, debt - holders or the depositor safety net provided by governments5. last but not least, the inherent human decision - making limitations6 mean that actual human beings often fail to take the rational choices usually assumed in the standard academic literature. regardless of why asset price bubbles arise, there is little doubt that they pose potential risks for financial stability, especially when they involve bank - provided debt finance. in terms of the ecb ’ s framework for the analysis of systemic risk7, asset price bubbles can contribute to the build up of financial imbalances which can unwind suddenly and cause the collapse of the banking system, with serious consequences for the real economy. we know that asset price bubbles and financial crises can cause severe economic di

the ecb11 shows that the leaning against the wind attitude embedded in the ecb ’ s monetary analysis has contributed to containing the build - up of financial imbalances prior to the financial crisis. as a result, it has prevented a more significant fall out in economic activity during the crisis and larger risks to price stability. therefore, this analysis shows that a cautious leaning against excessive money and credit growth and building financial imbalances as part of the monetary pillar can bring benefits not only for financial stability but also for price stability. let me sum up. the historical evidence clearly shows that asset price bubbles can build up over time and, if unchecked, start to pose significant risks to systemic stability. we have been reminded that the materialization of such risks can have great economic costs, not only due to low growth and losses of income, but also in terms of heavy burdens on public finances. so what can we learn for economic policy? first, we have to improve the general monitoring and analysis of asset price developments and potential financial imbalances. second, we have to not only strengthen the micro prudential regulatory framework through better liquidity and capital provisions, but we also have to build up a strong macro prudential framework. the experiences since 2007 crisis have taught us that ensuring the stability of individual banks is not enough for the stability of the system as a whole. this is why we established the esrb in january 2011 and tasked it with identifying and prioritising systemic risks, issuing early warnings when significant systemic risks emerge and issuing policy recommendations for remedial action. borio and zhu ( 2008 ), maddaloni and peydro ( 2011 ), jimenez, saurina, ongena and peydro ( 2010 ), adrian and shin ( 2011 ), jimenez, saurina, ongena and peydro ( 2010 ). fahr, motto, rostagno, smets and tristani ( 2010 ). the paper uses simulations with the christiano, motto, rostagno ( 2009 ) model. bis central bankers ’ speeches and third, we have to make use of our monetary policy framework to come by financial imbalances that go along with excessive growth in money and credit. our monetary policy is focused on the medium term and grants a distinct role to the analysis of monetary and credit developments. this is instrumental that the ecb is not only ensuring medium term price stability, but also contributes to the stability of the financial