november 2015 edition of the ecb ’ s financial stability review, and fsb ( 2015 ), global shadow banking monitoring report. shek, j., i. shim and h. s. shin ( 2015 ), “ investor redemptions and fund manager sales of emerging market bonds : how are they related? ”, bis working papers no 509. bis central bankers ’ speeches which offer a transparent means of calculating initial margins as well as explicit numerical haircut values that can be set as floors to haircut and margin calculated with internal models. concluding remarks let me conclude. europe needs to further integrate and develop its capital markets, and substantially so. in the absence of other cross - country risk - sharing mechanisms for the time being, this has a lot of promise for insuring european households and firms against national business cycle fluctuations. we need to be determined and ambitious in pursuing a capital markets union that will deliver these benefits. this means to provide the conditions under which capital markets can flourish across the euro area and eu and at the same time, to design a regulatory and supervisory framework under which financial stability risks are under control. i am now looking forward to the upcoming discussion of the high - level policy panel, that it will give us further food for thought on how to create a long - term vision for cmu, thus striking the right balance between the two dimensions i have discussed. bis central bankers ’ speeches

best answer to these challenges today is to look at a range of some 600 phillips curves to quantify the uncertainty around our baseline outlook. another instance of uncertainty is the nature of the shocks hitting our economies. should we decide our policies on the assumption that future outcomes will be normally distributed around some expected average? how risk adverse should we be when considering this distribution, or, in other words, should we conduct policy on the basis of expected outcomes or with a view to minimising losses in extreme scenarios, as we request banks to do when we run our stress tests? so, monetary policy has a lot to do with risk management – as does the economics profession more generally. economists need to be humble when articulating policy. every baseline is surrounded by large uncertainty bands and tails can be very fat! second, perhaps the defining challenge for our profession is that our understanding of the economy is never settled. we cannot blindly trust in models, even if they have been running for a long time. every model is a vastly simplified representation of economic reality, which incurs the risk of misspecification and may result in inadequate policy guidance. misspecification, or model uncertainty, is different from parameter uncertainty. take the recent financial crisis as example. i often hear the criticism that economists failed to predict the outbreak of the financial crisis. this criticism is nonsense. or do we expect physicians to predict illnesses? we don ’ t, of course. but we expect them to help us cure illnesses. economists should do the same. they should be judged by the quality of the advice they give. in this sense, the crisis exposed at least three shortcomings in central bank models. the most apparent limitation was the absence of a meaningful financial sector, which left models at a loss to explain the origins of the crisis and its consequences for the economy. the second limitation was that the prevailing models were built on a standard linear gaussian set - up and hence proved inadequate to examine shocks on the scale of the global financial crisis. and the third limitation was that the models did not take into account the lower bound constraint on nominal interest rates, a constraint which started to bind just a few months after the beginning of the crisis and that helps to explain, for example, why fiscal multipliers have been underestimated in the aftermath of the crisis, with tragic social consequences. the implication is that our models require regular review and scrutiny in order to remain useful for decision - making. few models are valid