mitigated because pspp - eligible bonds need to satisfy minimum credit quality requirements. overall, a proper weighting of costs and risks vs benefits must take into account that the maintenance of price stability is the primary objective for monetary policy. 2 accordingly, pspp is also proportionate stricto sensu. monetary financing prohibition as strict and important limit the principle of proportionality works as a disciplining device for the ecb in choosing the instruments. in addition, however, the legal framework provides further, and even stricter, limits. an important case in point is the prohibition of monetary financing as enshrined in article 123 of the treaty. while this reads prima facie as a constraint on monetary policy, it may also strengthen the maintenance of price stability. in fact, historical evidence has pointed to the negative consequences which historically have been associated with central banks ’ attempts to minimise the financing burden of governments. and literature has shown that high inflation, which can arise from such subordination of monetary policy to fiscal needs, is in turn detrimental for growth. 3 therefore, the monetary financing prohibition rules fiscal considerations out which could distract the governing council from its core monetary policy task. it helps to protect the ecb from political pressures. the ecb ’ s purchases of public - sector debt instruments as part of the app are a good example how this prohibition is applied : first of all, we do not buy government bonds in the primary market – which is explicitly forbidden under article 123 – but only in the secondary market. purchases of public - sector bonds in the secondary market in turn are forbidden, if they circumvent the monetary financing prohibition, i. e. have an effect equivalent to that of purchases in the primary market. we have made sure that this is not the case by putting in place several safeguards4. as one of these safeguards, pspp purchases adhere to a blackout period, i. e. the eurosystem does not buy around the date of a new issuance, which facilitates the formation of market prices for pspp - eligible securities. furthermore, the relevant securities are also subject to an issue share limit and an issuer limit, which preserve market functioning. these features are compliant with the requirement to act in accordance with the principle of an open market economy. when weighting the “ benefit ”, though, one may consider that as the usage of these instruments is expanded to very high proportions, they may start to display diminishing returns at some

yves mersch : scope and limits of monetary policy introductory remarks by mr yves mersch, member of the executive board of the european central bank, at the panel “ europe ’ s economic and monetary policy ” during the ambrosetti conference on the outlook for the economy and finance, villa d ’ este, cernobbio, 9 april 2016. * * * ladies and gentlemen, over recent years, the role of the ecb ’ s monetary policy has been more actively debated than ever before, and its measures have become the subject of heightened scrutiny. this examination often addresses the limits of monetary policy. some have argued that monetary policy is running out of instruments ; others, by contrast, have asserted that the ecb, by making use of a plethora of instruments, is over - stretching its remits. so let me enter this discussion and focus on the scope and limits of monetary policy. to give you the main message upfront : the legal framework of the european economic and monetary union assigns the ecb ’ s monetary policy with the primary objective of maintaining price stability. it outlines the set of monetary policy instruments in general and provides the governing council with broad discretion in the choice of these instruments to achieve its objective. at the same time, the framework sets limits of what monetary policy must not do and pursue – in particular prohibiting monetary financing of governments. acting within this framework, our measures taken over the last years have shown that we are not short of instruments : the scope of monetary policy instruments is wide and flexible enough to effectively fulfil our mandate. acting within this framework also ensures that we do not encroach upon the area of economic policy. this constraint has recently been confirmed by the court of justice of the european union in the omt case. objective and instruments the ecb ’ s objective is to ensure price stability in the medium term. the standard instruments that the ecb deploy are its key interest rates. these are adjusted to provide or withdraw monetary stimulus to achieve the objective. such changes in policy rates are transmitted via financial market prices, wages, households ’ and firms ’ inflation expectations, etc. under normal conditions, this transmission follows predictable patterns which allow calibrating the stimulus. in highly perturbed conditions, however, transmission might become impaired. the policy implementation process needs to be altered as a consequence. indeed, we have been facing unprecedented challenges to which we had to respond with non - standard instruments. let me give you some examples of the past :