##prudential framework in europe and in the euro area is specifically tailored to reflect the european institutional features and financial architecture. as elsewhere in the world, also in the european countries the national macroprudential authorities play the key role in macroprudential analysis and policy - decisions : they are, or at least should be, best informed of the cyclical and structural macroprudential risks and vulnerabilities in their countries. in the countries belonging to the banking union, the macroprudential powers are shared between national designated macroprudential authorities and the european central bank. more specifically, the ecb has a right to apply stricter requirements for certain macroprudential tools than those proposed by the national macroprudential authorities. the role of the european systemic risk board ( esrb ) is, in turn, to monitor cross - border and cross - sectoral systemic risks in the whole eu area, and provide macroprudential warnings and recommendations to national authorities and european bodies. last but not least, the european capital adequacy framework ( crd iv / crr ) provides a common regulatory rulebook directing also the use of most macroprudential tools. the european macroprudential set - up is generally appropriate for europe ’ s bank - based, highly integrated and thereby potentially fragile financial system. research suggests that banking oriented financial systems – like that in europe – may be particularly prone to systemic risks and crises. 4 in highly integrated markets these risks and crises can rapidly spread across borders and markets. one of the strengths of the euro area macroprudential policy, as i see it, is that the joint responsibility between the ecb and national authorities is likely to reduce the inaction bias inherent in taking unpopular and intrusive macroprudential actions. the esrb, by closely monitoring and evaluating national macroprudential frameworks and policies, plays a similar role in the whole eu area. there are also weaknesses in the european framework. some eu - level regulatory rules and procedures concerning the use of macroprudential tools are, as i see them, overly complicated and bureaucratic. for example, the european capital adequacy framework does not yet provide national authorities with fully satisfactory ways to increase residential mortgage risk - weights for macroprudential reasons. given the inherent inaction bias in macroprudential policy - making, a too complex regulatory rules may provide national macroprudential authorities a convenient excuse for def

today. the 1960s'idea that greater prosperity could be achieved if only we were willing to accept higher inflation had its origins in an academic study, although the author likely did not intend that outcome. in 1958, a. w. phillips, using british data, showed that historically inflation had tended to be high in years in which unemployment was low. similar results were subsequently reported for the united states. 4 phillips did not draw strong policy conclusions from his findings. but that did not stop others from doing so. in the decade following the publication of his paper, his empirical finding was sometimes interpreted ( including, for example, by members of the kennedy and johnson administrations ) as showing that policymakers could choose ( permanently ) lower unemployment if they were willing to accept ( permanently ) higher inflation in exchange. scholars disagree somewhat about the extent to which policymakers of the time tried actively to take advantage of this supposed tradeoff, but these ideas likely provided part of the intellectual rationale that made the authorities willing to allow inflation to rise throughout the 1960s and in the early 1970s. the idea of the permanent tradeoff did not go unchallenged, however. in 1967, economists milton friedman and edmund phelps independently produced influential critiques of this view. their key contribution was to observe that, if inflation expectations react to changes in actual inflation in an economically reasonable way, then any tradeoff between inflation and unemployment would be shortlived at best. to illustrate their argument, let us suppose that firms and workers set nominal wages once a year but that, sometime during the year, the prices of firms'output rise unexpectedly as a result of stronger - than - expected demand. the combination of higher prices for their output and fixed nominal wages would raise the profitability of increasing production ; thus, assuming that more workers are available at the previously fixed wage, firms would respond to the rise in prices by adding workers. over a short period, then, higher inflation might bring lower unemployment, consistent with the empirical results found by phillips. however, this logic applies only during the period in which wages and workers'expectations of inflation are fixed. if inflation were to rise persistently, friedman and phelps argued, workers'expectations of inflation would not remain unchanged but would adjust to match the actual rate of inflation. higher inflation expectations would in turn lead workers to bargain for commensurate raises in nominal wages to preserve the real value of their earnings. with nominal wages rising as well as prices, firms would no longer have an incentive to