the financial stability board and, in the case of the european union, the activation of the banking union, beginning with the ssm and the single resolution mechanism. the new monetary policy i shall now turn to the challenges central banks face. the first is, evidently, identifying what is understood by the “ new normal ”. one question on which economic policy discussions are focusing is whether the advanced economies are in a new situation of secular stagnation, a “ new normal ” characterised by low growth, low inflation and low interest rates. we are seeing how, despite lower unemployment rates and the closing of the gap between potential and real output, inflation rates remain persistently low. a series of factors can account for this behaviour. some are transitory, such as the insufficient increase in employment, or the impact of deleveraging processes in some economies. but there are 4 / 7 also factors of a more structural nature, including the effect of globalisation and technological progress, or demographic factors. in any event, it should be stressed that there are other policies apart from monetary policy. in particular, both fiscal policy and structural reforms have a key role to play in supporting demand, boosting real interest rates and raising productivity and potential growth. regarding monetary policy, the central question is this : to what extent should the macroeconomy of the “ new normal ” lead to a new “ conventional model ” for monetary policy? in particular, it is considered whether the management of the central bank ’ s balance sheet will become entrenched as a permanent part of the normal instruments of monetary policy. estimates, while subject to major uncertainty, suggest that real interest rates and inflation will remain at low levels, meaning that nominal rates will also be low, thereby limiting their effectiveness as a monetary policy instrument. against this background, central banks are likely to retain the use of unconventional monetary policies. analysis of these policies is leading to debate, as yet inconclusive, on their effectiveness, the optimal size of central bank balance sheets and on the impact that they might have in terms of financial stability and the medium - and long - term fiscal situation. true, as the recovery gains momentum, and provided this translates into a sustained adjustment by inflation towards its target, the need for monetary policy to support the economy will tend to diminish. the us federal reserve has already begun to reduce its balance sheet at a gradual and predictable pace, and the ecb has slowed the pace of increase of its own balance sheet. this reduction

out on the main driver of the great moderation. several explanations have been proposed, among them better monetary policy ( in other words, central bankers learnt the lessons of the 1970s ) and plain good luck ( that is milder economic shocks ). a third explanation refers to structural changes, namely in economic institutions, technology, business practices – and in the financial system. against this background, i found the paper by viral acharya, jean imbs and jason sturgess very stimulating. inspired by portfolio theory, their paper concludes that the kind of financial modernisation they examine – deregulation of branching restrictions in the us – affects the efficiency of capital allocation through its effect on the volatility of output growth, rather than through its effect on the growth rate of output itself. this is so because the primary effect of branching restrictions appears – from a risk standpoint – to limit banks ’ scope for diversification ( and thus scope for investment activity as a whole ). hopefully, other researchers will follow suit and investigate further the link between structural changes in financial systems and output volatility. as an aside, i would like to add that the paper by imbs et al. might also be interesting from a totally different angle : their application of portfolio theory aims at further diversifying the finance and growth methodology. only yesterday, george von furstenberg and ulf von kalckreuth reminded us not to fall into the trap of taking well - known methodological assumptions for granted. therefore, the attempt to tackle the finance - growth nexus using “ unorthodox ” methods ( such as portfolio theory ) might serve as a promising robustness check. 3. financial market integration and modernisation in the eu 3. 1 financial market integration why is the finance - growth nexus relevant to the eu? or, put differently, why did the ecb - cfs research network decide to devote this conference to it? as we are well aware, many european countries urgently need to strengthen growth and increase employment. real gdp growth ( yoy ) in the euro area averages out at only about 2 % in the last ten years, compared with slightly more than 3 % in peter m. summers ( 2005 ) : what caused the great moderation? some cross - country evidence, in : economic review ( q3 2005 ) of the federal reserve bank of kansas city the us. the same goes for real gdp growth per person employed, which has been roughly 1 % ( yoy ) over the last