. 5. monetary policy and financial stability should financial stability considerations interfere with the determination with which central banks pursue their primary target? i would start by emphasizing the strong link between price and financial stability in the medium run. it is hard to maintain a sound financial system in a ( persistently ) depressed economy. all measures aimed at closing output and price gaps after a long recession are therefore compatible with the financial stability objective of reducing systemic risk. true, this link may be loose in the short run ( as masciandaro recently restated ). a large body of evidence suggests that risk appetite is endogenous and is affected by monetary policy. bernanke ( 2015 ). bis central bankers ’ speeches investors take on risk, potentially up to undesirable levels, when monetary conditions are too loose. this is by now well documented for both bank lending and market finance. 5 the first issue is how to identify this phenomenon. in order to spot changes in investors ’ risk attitude, policymakers need to look at a broad set of information. monetary policy decisions must be taken on the basis of indicators such as credit developments, bank lending conditions and asset prices. 6 in my view, the data speak quite clearly as of today. the italian credit cycle, measured by a detrended credit - to - gdp ratio, turned negative around 2010 and has remained so ever since ( figure 7 ). the same is true of the euro area overall. figure 8 shows a cyclical indicator that combines information on housing and financial prices and on credit aggregates. the indicator shows that the euro area is lagging behind the united states in terms of financial recovery, and that cyclical conditions in europe are still mildly negative. this does not mean that risks may not be rising in individual countries or sectors, but nor does it signal “ excessive risktaking ” in the aggregate. the second issue is what to do if and when the indicators signal an increase in systemic risk. my answer is that macroprudential policy should be used as the first line of defence. of course, monetary policy can also play a role, but the debate on what exactly this role should be is far from over. monetary policy has the advantage that “ it gets in all of the cracks ” of the financial system ( stein 2013 ), but it might also be a blunt instrument, as the benefits of fixing sectorial imbalances through it may be offset by large macroeconomic costs ( svensson, 2015 ). macroprude

to make the path wider by setting out a comprehensive strategy designed to redirect the public finances to more productive uses and to increase the efficiency of general government, especially in spending programmes aimed at accumulating both material and immaterial public capital and at supporting business activity and innovation. it is in any case essential that the fiscal objectives are and appear to be strongly and credibly oriented towards financial stability, and that the reforms are effectively geared towards sustained – and inclusive – economic growth. tables and figures table 1 – macroeconomic impact of an increase ( 1 % of gdp ) in public investment expenditure financed through deficit spending according to the bank of italy ’ s quarterly econometric model years a. baseline scenario real gdp 0. 9 1. 1 1. 2 1. 2 1. 1 gdp deflator 0. 1 0. 4 0. 8 1. 3 1. 6 deficit - to - gdp / ratio 0. 7 0. 5 0. 5 0. 5 0. 6 debt - to - gdp ratio - 0. 5 - 0. 6 - 0. 7 - 0. 7 - 0. 4 b. reduced efficiency of investment expenditure real gdp 0. 5 0. 7 0. 8 0. 8 0. 8 gdp deflator 0. 0 0. 2 0. 5 0. 7 1. 0 deficit - to - gdp / ratio 0. 8 0. 6 0. 6 0. 6 0. 6 debt - to - gdp ratio 0. 1 0. 3 0. 4 0. 6 1. 0 c. increase in borrowing costs ( * ) real gdp 0. 9 0. 9 0. 8 0. 8 0. 7 gdp deflator 0. 1 0. 3 0. 7 1. 0 1. 2 deficit - to - gdp / ratio 0. 8 0. 6 0. 8 0. 9 1. 1 debt - to - gdp ratio - 0. 4 - 0. 1 0. 3 0. 9 2. 0 ( 1 ) percentage changes compared with the baseline scenario. ( 2 ) absolute changes compared with the baseline scenario ( percentage points of gdp ). ( * ) permanent increase of 10 basis points in the yields on short - term government securities and of 50 basis points in the yields on medium - term government securities. source : f. busetti, c. giorgiantonio, g. ivaldi, s. mocetti, a. notarpietro and p. tommas