will definitely be introducing sdd by november 2010 at the latest. this will motivate a lot of companies to finally set sail and start implementing sepa. the outcome of the third stage of the sepa journey, sepa for cards, is perhaps the most uncertain. the eurosystem continues to encourage market participants to introduce a european card scheme. joint research by the european central bank ( ecb ) and de nederlandsche bank shows that the launch of a new european card scheme could provide the impetus for solving the problem of interoperability and overcoming the costly fragmentation of the european card market. consumers and merchants are likely to benefit most from sepa when sufficient competition in the card payment market alleviates any potential monopolistic tendencies. the ecb appreciates, therefore, the different initiatives that have a european card scheme as their destination and welcomes the travel preparations made by them. that said, we should not lose sight of our objective by starting even more initiatives. instead, the projects that have already taken off are invited to get down to business and perhaps combine forces. now is the time to come up with concrete travel plans, including defining and committing to milestones. perhaps it is not by chance that the british prime minister ’ s strategy unit is located in admiralty arch, with the statue of captain cook in front of it. with everything that we hope to achieve for sepa in the short and medium term, we must not lose sight of the broad sepa strategy and our long - term objectives. the objectives of greater harmonisation and increased innovation in the past, the main reasons for exploration at sea were political as well as commercial, such as the discovery of new trade routes. however, captain cook ’ s voyages in particular had an explicitly scientific purpose, too. the aim of his first journey, for example, was to observe and record the transit of venus across the sun. sepa is a project driven by business as well as politics and is also gaining more and more academic attention. a research conference held recently at the ecb found that a fundamental relationship exists between the retail payment business and overall banking performance. there is academic evidence that, in countries with more developed retail payment markets, the banks perform better. this relationship is stronger in countries which have adopted a relatively high number of technologies for retail payment transactions. starting in the 15th century, the age of discovery was characterised by increased competition among explorers in order to be the first to discover the last remaining uncharted waters.

estimated autoregressive processes, in addition to the identification assumptions which impose some ordering of the flow of causality. in dsge models, inertia is built in via microfoundations, with frictions such as habit formation in consumption, sticky or backward - looking wage and price setting, and adjustment costs in investment. finally, semi - structural models use a combination of these empirical auto - regressive processes and economic frictions. in addition to the lags associated with the slow and staggered adjustment of investment and consumption to changes in financial conditions, the full impact of policy rates on financial conditions is not immediate. in particular, fixed - rate loans and deposits provide some near - term insulation to changes in interest rates. however, as financial contracts expire, more and more firms and households face higher interest rates and the tightening of financial conditions is further amplified by the endogenous shortening of maturities in response to higher interest rates. this will be a recurring theme in this lecture, in particular when i turn to how the current tightening is being transmitted. finally, our overall policy stance is also affected by our balance sheet polices. our models suggest that reducing our asset portfolio by a normalised cumulative €500 billion reduction over 12 quarters contributes to lowering inflation by 0. 15 percentage points and output by 0. 2 percentage points ( chart 2, right panel ). chart 2 macroeconomic impact of a 100 basis points monetary policy shock ( left and middle panel ), 12 - quarter cumulative impact of a standardised €500 billion balance sheet reduction ( right panel ). ( deviation of output in per cent ; year - on - year percentage points ) sources : ecb staff calculations. notes : left and middle panels : this chart depicts the impulse responses of real output and inflation to a standard short - term interest rate shock ( normalised to 100 basis points ) for the ecb - base model, the new area wide model ii ( nawm - ii ), the mmr model, standard projection - based tools ( bme ) and a large bvar model including both macro and financial variables. output gap refers to the output gap as a percentage of potential or steady state gdp. inflation is in year - on - year percentage change. all responses refer to deviation from the baseline in percentage points. for bmes the latest observation is for q16, for all other models q20. right panel : the bars display a cumulative impact on inflation and the output gap over three