, on expanding the policy toolkit of central banks, the ecb is no exception. the environment of low interest rates and low inflation forces us to constantly review and upgrade our analytical toolkit to ensure we take the best possible decisions in our pursuit of price stability. 2 see also draghi, m. ( 2017 ), “ the interdependence of research and policymaking ”, speech at the lindau nobel laureate meeting, lindau, germany, 23 august. unofficial euroisation as a policy challenge let me therefore spend a few minutes on the one recommendation that is specific to candidate and potential candidate countries, albeit not uniformly to all, namely that the use of local currencies be strengthened. as you know, the high degree of unofficial euroisation is a striking feature of the banking systems in the western balkans. in the region as a whole, on average 56 % of total loans and 52 % of total deposits are denominated in, or indexed to, foreign currencies, in most cases the euro. 3 mid - 2017 data. for further details, see the special feature on “ unofficial euroisation in cesee countries ” in the international role of the euro, ecb, 2017, pp. 45 – 49. this phenomenon, also known as currency substitution, is driven by many factors, such as low confidence in the domestic currency, which is often the result of not - so - distant memories of monetary instability. another factor relates to the fact that the risk premium on loans in the domestic currency is higher, thereby providing an incentive to take out foreign currency loans. lower funding costs, in turn, are often supported through strong integration with the euro area via trade and financial channels, but also via migration and remittances, which contribute to the holding of bank deposits in euro. all this is conducive to widespread unofficial “ euroisation ”. but a high degree of foreign currency use also has serious drawbacks. for example, unofficial euroisation, while being a sign of trust in the euro as a stable store of value, constitutes a financial stability risk in the event of sudden and substantial exchange rate fluctuations. households and firms may suddenly no longer be able to service their foreign currencydenominated debt, creating credit risk for banks. the same holds true for dollarisation in other parts of the world, as the asian financial crisis vividly demonstrated. unofficial euroisation also impedes monetary policy transmission and may limit the overall room for manoeuvre

, questioni di economia e finanza ( occasional papers ), 242, 2014. bis central bankers ’ speeches these policies would have been certainly regarded as “ conventional ” in the 1960s and 1970s given the emphasis on changes in the composition of private sector balance sheets both in actual policy - making and in academic works on the transmission mechanism of monetary policy. 7 what is more “ conventional ” for a central bank than creating base money? 10. asset purchases boost economic activity and raise inflation through several channels : they reduce yields on public sector securities, with effects on other segments of the financial market and on credit conditions for households and firms ; they increase the value of assets and hence private sector spending capacity ; they cause a depreciation of the currency, which impacts on imported inflation and exports ; and they improve inflation expectations and public confidence. 11. positive effects on the government bond market emerged as soon as the preparation of the programme was announced in early november 2014. since then, though with some reversal of the initial impact during the spring, the yields on tenyear german and italian government securities have fallen by about 25 and 80 basis points respectively. the stimulus has spread to market segments not directly affected by the asset purchases. the euro has depreciated by more than 12 per cent against the dollar and by around 8 per cent in nominal effective terms. 12. credit conditions have also been gradually improving since the announcement of the app : rates on new loans to firms and to households for house purchase have gone down by around 30 basis points on average in the euro area ; larger reductions were generally recorded in the countries hit by the sovereign debt crisis. positive effects can also be seen in lending volumes. after three years of contraction, the annual growth rate of credit to the non - financial private sector turned positive in april ; it stood at 0. 7 per cent in september. 13. the ultimate metric to gauge the effectiveness of the app is the normalisation of the inflation rate around its medium term target. it is too early to provide an assessment, given the lags of transmission of monetary policy, but the general improvements in financial conditions, the main channel through which the programme is expected to work, indicate that so far it has been successful. overall, the app has helped push the intended monetary policy accommodation through the intermediation chain and reach households and firms. this is expected to support economic activity and to produce a sustained adjustment of inflation rates towards levels consistent with the definition of price stability. 8 for italy