a single monetary policy does not mean that interest rates have to be the same everywhere. as the first economist, aristotle, said : “ equals should be treated equally and unequals unequally. ” using monetary policy to equalise the unequal risks allocative distortion. and the euro - area crisis, in particular, has highlighted the negative longterm economic impact of capital misallocation. it is also clear that central banks influence the financial markets with their instruments, whether through refinancing operations, securities transactions or other measures. but what does that mean for the integration of the european financial markets? in other words, what role do central banks play for financial market integration? and what impact will closer integration ultimately have on monetary policy? bis central bankers ’ speeches i would like to explore these questions in the next 20 minutes. in doing so, i will look at the different financial market segments individually : the money market, the bank loan market, the bond market and the capital markets. 2. the money market let me start with the area of the financial market that is especially relevant to monetary policy – the money market, and more specifically the interbank market. it is via this market that monetary policy stimuli are traditionally transmitted to the banks and, from there, to the other areas of the financial markets, finally reaching the real economy, which is how monetary policy influences price developments. the introduction of the euro resulted in the comprehensive integration of the european interbank market. this was reflected by a sharp increase in cross - border interbank transactions, small differences between policy rates and interbank rates as well as a lean central bank balance sheet. only a small number of refinancing operations was necessary in order to transmit monetary policy stimuli. the interbank market made sure that central bank liquidity was passed on to the institutions that needed it. the outbreak of the financial crisis changed this in one fell swoop. mistrust between the private money market players began to take hold and the spread between the risk premiums for secured and unsecured money market transactions skyrocketed, the volume of money market transactions fell and the number of participants in monetary policy operations soared. the governing council of the ecb reacted swiftly and decisively by switching its refinancing operations to tenders with full allotment. as long as banks were able to pledge adequate collateral, they received unlimited amounts of liquidity from the eurosystem. in practice, this allowed them to bypass

hasn't turned out that way. so the large, swift contraction of mid 2020 has been reversed by a similarly swift recovery. graph 5 gdp through recessions indexed to gdp peak index index 1970s 1990s 1980s 2020s - 2 - 1 quarters from peak sources : abs ; rba we see the same pattern after subsequent lockdowns as well. spending declines when they are in force, but the recovery is rapid. timely data on spending suggest that the snap - back after the shorter lockdowns imposed in parts of australia this year has been almost immediate. the big question for the outlook is whether the recovery is simply a snap - back to prior patterns of activity, or whether there is some make - up from the lost growth. this is, in fact, the same question i addressed in that 2019 speech : when you hit an economic bump – whether it is a flood, a cyclone or a lockdown to control a pandemic – do you just return to normal, and the production that didn't occur during the bump is lost forever? or is there a period of catch - up, where spending is higher than normal for a while? the answer is shaping up to be that it depends on which category of spending we are talking about. there are some categories of spending where catch - up is feasible. mostly these are for durable goods, where timing of purchases can shift around. certainly we have seen this in vehicle sales ( graph 6 ). but most of the categories of spending that were most affected by restrictions on activity were services, especially in - person services. it is much harder if not impossible to catch up here. if you weren't able to get a haircut for a few months, you don't get two haircuts to make up for it – one will suffice. and while some hospitality and travel spending might see some catch - up as we finally catch up with all the friends and family we've only been able to see on a screen, there are limits to that. graph 6 new car sales monthly ’ 000 ’ 000 business household sources : rba ; vfacts when policy supports, people respond a third lesson relates to one of the key reasons why this time we did get a v - shaped recovery. support from various arms of policy helped to sustain economies through the periods of lockdown, smooth the shock and speed up the recoveries. the use of wage subsidies to preserve employment had been a feature of labour markets in some advanced economies