of major determinants of inflation – fully recognized by the governing council of the ecb. that is the reason why we rely upon a binocular vision of the factors of inflation, i. e. as a monetary phenomenon according to pillar 1 and as the result of short - term to medium - term developments of inflation according to pillar 2. this framework is also well suited to addressing the asset price bubble issue. in this context, the first pillar is very helpful for analysing how ample liquidity is within the euro area, that is to say how much the broad monetary aggregate ( m3 ) deviates from its reference value, and how economic agents make use of this liquidity : credit and loan developments are carefully monitored, in line with economical and financial developments. portfolio shifts are also an important part of the monetary analysis. too rapid a credit expansion to the private sectors associated with large portfolios shifts towards equities and a strong rise in stock or asset prices would, under normal economic conditions, signal the risk of a bubble formation. the second pillar consists of a wide range of economic and financial indicators : stock and bond prices, housing prices, exchange rates are also analysed in depth. obviously, their assessment is made in the context of maintaining price stability over the medium term, and the ecb does not react to their signals unless price stability is endangered. to recap, if monetary policy does not react directly to asset price developments or to an asset price bubble, it has clearly to take under consideration all the consequences of these developments on aggregate demand and aggregate supply, on economic agents ’ confidence and expectations, since they may at some point affect price developments. let me now turn to my second point, that is the implications of asset prices bubbles for financial stability. 2. implications for financial stability over the last decade, we have experienced several financial crises and contagion episodes : just to name a few episodes, the mexican crisis in 1994 - 1995, the russian - ltcm in 1998, the “ tech - bubble ” that ended in 2000, or more recently the financial crises in argentina and turkey. however, recent j. m guttentag and r. j herring ( 1986 ), “ disaster myopia in international banking ”, essays in international finance, 164, princeton university. research has shown that, if the frequency of financial crisis is not significantly different from what was observed in previous periods over the long run ( 1883 - 1998 ), recent episodes were certainly shorter

response to a monetary stimulus. this may come at a cost in the longer run, however, as price rigidity impedes the adjustment process and reduces the efficiency of monetary policy. a large part of the perceived differences between the fed and the ecb in terms of policy reactions results, in fact, from differences in price flexibility. because of specific rigidities in europe, the fall in inflation that normally follows a decline in output materialized later and more slowly. moreover, it notably happened after several governments had implemented a series of structural reforms and adjustment policies in 2010 – 2011. this explains part of the delay in implementing non - conventional measures in europe, as compared to the united states. a third challenge comes from managing the risks that low interest rates and nonconventional policies imply for financial stability. significant advances have been achieved in developing proper macroprudential frameworks and instruments for the banking sector. strong capital and liquidity requirements have increased its systemic robustness. new countercyclical tools have been developed. progress has been made towards reducing moral hazard through proper resolution mechanisms for large and systemic institutions. however, the timeliness and efficacy of macroprudential measures on specific areas of exuberance, such as real estate, are still being put to the test. more importantly, i see one blind spot. risk has not fully disappeared but rather has morphed and migrated to new parts of the financial system. specifically, maturity transformation has developed outside the banking sector and by direct market intermediation. increasingly, it is taking place through vehicles – such as open funds and etfs – that issue very short - term ( often intraday ) liabilities and invest in long - term instruments. it may be a matter of priority to develop a conceptual and operational approach to macroprudential policy that allows regulators to monitor those parts of the financial system that are currently out of reach. bis central bankers ’ speeches * * * when central banks entered into non - conventional territory, most observers saw that as a temporary incursion. for some of us, this temporary situation has lasted seven years. for the euro area, the current horizon extends, at least, until 2017. this is quite a long period. for many young people today – say, for instance, current phds students -, conventional monetary policies are a prehistoric curiosity. non - conventional is the only “ normal ” that they have experienced in their lifetime as adults. will the future look like the past or be different? this