that there remain significant difficulties ( 1 ) in grasping the benefits and risks of some major “ mutations ”, namely important financial innovations and new business models, and ( 2 ) in predicting how the overall “ body ” reacts to specific stresses. 6. more specifically, i would argue that our analytical apparatus would still have to make progress in characterising the role of non - bank financial intermediaries. for example, the “ explosion ” of the industry of highly leveraged financial institutions from around 100 billion us dollars of capital under management in 1990 to 3 trillion dollars in 2007 implies that this industry is likely to generally have important systemic implications, even though the present crisis was not caused by failures of large hedge funds. many hedge funds are highly sophisticated, but this does not imply that in the aggregate they always act in the stabilising contrarian way perceived by some observers. recent research about the “ dot. com ” bubble episode bis central bankers ’ speeches 7. the second intellectual challenge for such an analytical apparatus relates to when and how a financial system migrates from tranquility to a severe crisis. it appears to me that in economics we have some way to go in understanding the triggers, speed and abruptness of such migrations. see, for example, the sudden eruption of systemic instability in august 2007 and its dramatic worsening in september 2008, as reflected in a new indicator of systemic stress developed by ecb staff displayed in chart 1 of my article. in physics, however, “ phase transitions ” are the subject of ample research since a long time. for example, jean - philippe bouchaud from the ecole polytechnique here in paris has shown how fundamental research in physics on “ crackling noise ” and “ self - organised criticality ” can be applied to transitions to financial crises. this helps, for example, to understand the initial persistence and subsequent abrupt breakdown of financial bubbles. while this type of approach closely matches a number of important empirical patterns in asset prices, for example, it does not assume very high levels of rationality of economic agents, a strong tendency towards equilibrium situations or universal efficiency of financial markets. this observation might be insightful, if we compare it with the standard models that are nowadays used in economics. 8. the third challenge concerns how financial instability interacts with the macroeconomy. in my article, in chart 2, i have illustrated how drastically major forecasting institutions missed the start of the “ great recession ”, the “ free fall ” of economic

the favourable impact of the recent monetary policy measures on aggregate demand, and by the impact of the lower euro exchange rate, the base effects that will materialise later in 2015 and somewhat higher oil prices in the years ahead, inflation rates are expected to increase consistently over the short and medium term. the ecb will continue to closely monitor the risks to the inflation outlook. in this context, the governing council will focus in particular on the pass - through of our monetary policy measures, as well as on geopolitical, exchange rate and energy price developments. our monetary policy continues to aim at safeguarding price stability. since mid - 2014 we have taken a number of both conventional and unconventional measures. monetary policy measures adopted in the second half of 2014, such as the tltro, cbpp3 and abspp, had resulted in a material improvement in terms of financial market prices. in january 2015, the governing council launched an expanded asset purchase programme to address the heightened risks of too prolonged a period of too low inflation, encompassing purchases in the secondary market of euro - denominated investment - grade securities issued by euro area governments and agencies and european institutions. we intend to purchase private and public securities until end - september 2016. in any case, we will continue the purchases until bis central bankers ’ speeches the governing council sees a sustained adjustment in the path of inflation which is consistent with its aim of achieving inflation rates below, but close to, 2 % over the medium term. in its assessment, the governing council will follow its monetary policy strategy and concentrate on trends in inflation, looking beyond any unexpected movement of inflation in either direction if it is regarded as transient and deemed to have no implications for the medium - term outlook for price stability. there is clear evidence that the policy measures are effective, as financial market conditions and the cost of external finance for the private sector have eased considerably over the past months and borrowing conditions for firms and households have improved notably, with a pick - up in the demand for credit. as regards fiscal policies, we concur with the imf weo assessment that the by and large neutral euro area aggregate fiscal stance in 2015 continues to appear broadly appropriate, although it masks significant heterogeneity across countries. many euro area countries still face significant consolidation challenges in order to reduce high debt ratios and to ensure fiscal sustainability. the flexibility within the stability and growth pact should be used wisely and should not lead to increased debt sustainability risks and making countries vulnerable to economic shocks in