investors in the restructuring of the greek public debt clearly revealed the implications of the ban on the financial rescue of a member state imposed by the maastricht treaty and of the lack of a protocol for handling sovereign crises. the tensions became systemic ; the countries that suffered the most were spain, above all owing to its banking system ’ s excessive exposure to the property market, and italy, which was vulnerable because of its high public debt and the loss of competitiveness and growth capability in connection with the country ’ s pronounced slowness to adjust to the major political, commercial, demographic and technological changes of the last twenty years. the yield spreads between the euro - area ’ s sovereign securities increased rapidly. for some countries, including italy, they rose far above the level justified by the economic fundamentals. the spread between ten - year btps and german bunds, still less than 200 basis points in the first half of 2011, reached 550 basis points at the end of that year. after narrowing in the early months of 2012, it returned above 500 basis points in july. we estimated then − and explained in technical analyses and public interventions − that less than half of this amount was due to the weaknesses of our economy ; the rest reflected the fears of the single currency breaking up. bis central bankers ’ speeches national policies and european reforms to achieve a given number of objectives, economic policy must have at least an equal number of independent instruments at its disposal. and in fact the european strategy in response to the crisis did identify two instruments with which to pursue two objectives : national policies to remove the fragilities present in individual economies and a strengthening of the union to dispel the fears for the integrity of the single currency. in this case, however, since the fears of euro reversibility and those for member countries ’ debt sustainability fueled each other, the instruments were not independent. the reform of european governance thus necessarily hinged on the tightening of the budget rules and the introduction of new procedures for the control of other macroeconomic imbalances. the considerable time needed to implement this strategy conflicted, however, with the persistent market uncertainties and the lack of an instrument, such as a common budget, that would make it possible to combat the recession that had followed the financial crisis, offsetting the adverse short - term effects of the necessary national budgetary adjustments with expansionary unitary policies. the succession of conventional and unconventional monetary policy measures helped to make market conditions easier and, as far as possible, to

historically low interest rates. on the other hand, such policies have the potential to raise the likelihood of financial instability in the future. so, the questions that i ’ m often asked regarding these matters are as follows : do the regulators and the fed have adequate safeguards in place to mitigate this potential financial risk? if not, should the fomc step away from what we thought was the best monetary policy with respect to our dual mandate? should we discard our nonconventional tools and raise the fed funds rate in order to reduce the possibility of undesirable financial imbalances in the future? i don ’ t believe that such monetary policy adjustment is the right approach. i think the inference that persistently low interest rates pose a danger to financial stability is based on a narrow view of the economy. this narrow view is unlikely to survive a broader analysis that takes into account all the interactions between financial markets and real economic activity. if more restrictive monetary policies were pursued to generate higher interest rates, they would likely result in higher unemployment and a sharp decline in asset prices, choking the moderate recovery. such an adverse economic outcome is unlikely to set a favorable foundation for financial stability. moreover, our short - term interest rate tools are too blunt to have a significant effect only on those pockets of the financial system that are most prone to inappropriate risk - taking. at the same time, these blunt tools could significantly damage other markets, as well as the growth prospects for the economy as a whole. therefore, stepping away from otherwise appropriate monetary policy to address potential financial instability risks would degrade progress toward maximum employment and price stability. this approach would be a particularly poor choice when other tools are available, at lower social costs, to address the risk of financial instability. let me be clear. i am not saying that financial stability concerns are not relevant for the economy or that policymakers should not take decisive action against developments that threaten financial stability. rather, i am saying that the macroprudential tools available to policymakers are better - suited safeguards to addressing financial risks directly. these macroprudential actions can be dialed up or down given the appropriate setting of monetary policy tools ; so, undesirable macroeconomic outcomes are less likely than if we were to resort to premature monetary tightening. indeed, any decision to instead rely on morerestrictive interest rate policies to achieve financial stability at the expense of poorer macroeconomic outcomes must pass a cost – benefit test. and such a test