bill for the salvage operation in case the bank fails, the incentives to monitor the bank are huge. this dilemma is not new in theory, but has now become of great practical importance as financial globalization progressively is making national borders less relevant. asset prices, financial stability and monetary policy are there instances when these goals come into conflict with each other? this question has become particularly relevant in the last few years as asset prices have surged, while, at the same time, consumer price inflation has remained muted. on the whole, i think it is reasonable to assume that price stability in the long run reinforces financial stability. the main reason for this is that low and stable inflation reduces the risk of misallocating investments. although i believe that low inflation fosters financial stability, it would be wrong to disregard the possibility that changes in the inflationary process can have unintended consequences for the stability of the financial system. the success in bringing down inflation has lowered both nominal and real interest rates. moreover, factors such as the integration of emerging markets into the world trading system, and high productivity growth, has put downward pressure on prices of manufactured goods. this may have induced key interest rates to be lower, than what otherwise would have been justified in this cyclical position of the economy. given the fact that the low inflation regime has yielded high and stable growth, in conjunction with low interest rates, it is no wonder that asset prices have surged. while much of this price movement is fundamentally based, there is a risk that households and firms might become too optimistic about future earnings and interest rates. put differently, there is a risk that see e. g. schinasi, g. ( 2004 ) : ” defining financial stability ”, imf working paper, wp / 04 / 187. asset prices rise to unsustainable levels during the transition from a regime with high inflation to a regime with low inflation. another, but not unrelated issue, concerns how risk is priced in the credit markets. the last few years saw risk premiums in credit markets falling to record low levels. the fall in risk premiums meant that the effect on asset prices were more important than what the changes in the risk free rate alone would suggest. while low risk premiums, taken at face value, signal a healthy economy, many supervisors and central banks were concerned that risk premiums had fallen too far. as we all know, risk premiums in credit market rose dramatically this summer. uncertainty over the value of us sub

##2 2014, the annual growth rates of mfi loans to the private sector were negative in cyprus, greece, ireland, latvia, malta, netherlands, portugal, slovenia, and spain. see for example darvas, zsolt, ( 2013 ), “ can europe recover without credit? ” using data from 135 countries, covering five decades, the study suggests that creditless recoveries, in which the stock of real credit does not return to the pre - crisis level for three years after the gdp trough, are not rare and can be characterised by remarkable real gdp growth rates. however, the study finds that the implications of these historical episodes for the current european situation are limited, as creditless recoveries are much less common in high - income countries, and such recoveries were associated with significant real exchange rate depreciation. cecchetti, stephan g and enisse kharroubi ( 2012 ), “ reassessing the impact of finance on growth ”, bis working papers no 381. bis central bankers ’ speeches credit growth that leads to the wrong type of investment creates financial imbalances eventually leading to crises, while doing little to support long - term economic performance. indeed, the 1999 – 2007 period saw a positive correlation between the initial level of gdp per capita and average total factor productivity ( tfp ) growth rates : the highest tfp growth rates were found in germany, austria, netherlands and finland, while in the “ catching - up ” economies ( spain, greece, portugal, ireland ) tfp actually declined. an important explanation for this is that capital in the latter economies flowed disproportionately into the non - tradable / services sector, which in general has lower productivity growth. investment was highest in the construction and real estate sectors, closely followed by retail, transport and leisure. 4 this experience shows us that the quality of credit matters as much as the quantity, and it implies that policymakers should focus on a broader question than just reviving credit – namely, “ how can we channel savings towards productive investment? ”. this focus on investment is warranted because, in the short run, it is key to boosting demand and creating a self - sustaining recovery. and over the longer run, ensuring that investment is efficiently allocated helps create a virtuous circle between productivity and credit, thus avoiding mistakes of the past. achieving this requires a policy agenda that encompasses both credit supply and demand factors. it requires that we unclog and divers