in particular to a policy rule of the taylor type, which places a relatively large weight on the output gap. orphanides and others have shown that in the seventies and eighties, estimates of the us output gap have been subject to large and persistent measurement errors. 8 on average, there has been a downward bias of this measure of economic activity which in turn led to a monetary policy of the fed that - with hindsight - must be judged as too expansionary. as a consequence, the late 1970s and the early 1980s have been characterized by high inflation rates in the usa. i believe that the bundesbank managed to prevent this kind of problems. our research has shown that the bundesbank did not assign an important role to the level of the output gap which is especially prone to the real - time data problem. instead, we focused on deviations of money growth from target, on deviations of the inflation rate from the price norm and on deviations of the growth rate of real output from the growth rate of potential output. 9 this approach is much less subject to measurement errors than one that uses the level of the output gap. see coenen, g., levin, a. and wieland, v. ( 2005 ) „ data uncertainty and the role of money as an information variable for monetary policy “, european economic review ( 49 ), pp. 975 - 1006. for the usa, see e. g. orphanides, a. ( 2003 ), the quest for prosperity without inflation, journal of monetary economics, 50 ( 3 ), s. 633 – 663. for the uk, see e. g. nelson, e. and nikolov, k. ( 2003 ), uk inflation in the 1970s and 1980s : the role of output gap mismeasurement, journal of economics and business, 55, s. 353 – 370. for germany, see gerberding, c., seitz, f. and worms, a. ( 2005 ), how the bundesbank really conducted monetary policy : an analysis based on real - time data ; north american journal of economics and finance ( forthcoming ). see gerberding, c., seitz, f. and worms, a. ( 2005 ), how the bundesbank really conducted monetary policy : an analysis based on real - time data ; north american journal of economics and finance ( forthcoming ). 3 / 4 based on our previous research on “ how the bun

flawed fiscal policies. only institutional reforms and fiscal policy adjustments can avoid overburdening central banks with an excessive workload. the sovereign debt crisis in the euro area is a clear example of a situation in which disentangling price and financial stability issues became virtually impossible, and in which the role of the central bank as a guardian of trust was crucial. the unconventional measures bis central bankers ’ speeches adopted by the governing council of the european central bank were actually aimed at countering distortions in financial markets and self - fulfilling debt runs which threatened the correct transmission of the eurosystem monetary policy and, ultimately, its ability to pursue the primary objective of price stability. the need for these measures arose, to a large extent, from fundamental weaknesses in the european institutional design and from delays or mistakes in the response to the crisis. the announcement of the involvement of private investors in the restructuring of the greek debt in the summer of 2011 made financial markets fully aware of the implications of the prohibition to intervene to rescue member states under the treaty on the functioning of the european union. this triggered a further worsening of sovereign risk assessments and led to a very serious crisis of confidence in the ability of the single currency to survive. the crisis became systemic ; the yield spreads between the government bonds of the countries under stress and german bonds rose dramatically. on this, again, curzio ’ s foresight is most remarkable : ten years before the sovereign debt crisis he had identified several of the key features that have characterized the situation as it actually unfolded : 2 the inevitable complexities of political decision making create the possibility of a self - fulfilling debt run, while the fundamental information asymmetry between national authorities, on the one hand, and multilateral organizations and private creditors, on the other, works against the creation of a climate of trust once a crisis emerges, and might even stand in the way of mobilizing public support for the government ’ s program. the european institutional weaknesses were clearly reflected in financial markets ’ risk assessment. the sovereign spreads came to be determined by two factors, one national and one european, linked respectively to the flaws of certain countries ’ economies and public finances ( sustainability risk ), and to the incompleteness of european construction and the attendant fears of a break - up of the monetary union ( redenomination risk ). in july 2012 the yield differential between the 10 - year italian btps and the equivalent german bunds was again just over 500 bps, compared with a value of