fabio panetta : central banking in the xxi century – never say never remarks by mr fabio panetta, deputy governor of the bank of italy, at the suerf / baffi carefin centre conference “ central banking and monetary policy : which will be the new normal? ”, milan, 14 april 2016. * * * accompanying figures and the table can be found at the end of the speech. 1. introduction at first glance, today ’ s global economic outlook gives plenty of ammunition to the critics of central banks. take the euro area – though its problems are by no means unique – where notwithstanding a strongly expansionary monetary stance, inflation is persistently low, growth is weak, and the recovery far more fragile than one would hope. it is unsurprising that in this environment we have got caught in a crossfire of questions on the nature of monetary policy. is the ecb pursuing the right objectives? is it doing so effectively? zero or negative rates and intrusive asset purchase programmes could cause all sorts of distortions, including financial bubbles or inequalities? is the ecb fully aware of this? and if so, does it care? these are important and intellectually challenging questions, and i will refer to them below to structure my remarks on “ what ( i think ) we learned ” about monetary policy from or after the financial crisis. however, they also raise a key point that to my mind is by far the most important lesson we can take from the last eight years : when it comes to monetary policy, “ never say never ”. when h. g. hawtrey wrote about central banking being an “ art ” in 1932, he could not possibly have foreseen the policy palette that central bankers would have at their disposal in the 21st century. for that matter, central bankers in the early 2000s could hardly have imagined it either. when put to the test they proved braver and more creative than anyone – including those within their own ranks – could have expected. two factors forced them to push the envelope : the end of the great moderation and their determination to do “ whatever it takes ” to keep the economy stable. pablo picasso – admittedly a far better artist than your average central banker! – notoriously gave this piece of advice to his students : “ learn the rules like a pro, so you can break them like an artist. ” central bankers learned and followed the ( taylor ) rules for many years, but were quick to break

. 5. monetary policy and financial stability should financial stability considerations interfere with the determination with which central banks pursue their primary target? i would start by emphasizing the strong link between price and financial stability in the medium run. it is hard to maintain a sound financial system in a ( persistently ) depressed economy. all measures aimed at closing output and price gaps after a long recession are therefore compatible with the financial stability objective of reducing systemic risk. true, this link may be loose in the short run ( as masciandaro recently restated ). a large body of evidence suggests that risk appetite is endogenous and is affected by monetary policy. bernanke ( 2015 ). bis central bankers ’ speeches investors take on risk, potentially up to undesirable levels, when monetary conditions are too loose. this is by now well documented for both bank lending and market finance. 5 the first issue is how to identify this phenomenon. in order to spot changes in investors ’ risk attitude, policymakers need to look at a broad set of information. monetary policy decisions must be taken on the basis of indicators such as credit developments, bank lending conditions and asset prices. 6 in my view, the data speak quite clearly as of today. the italian credit cycle, measured by a detrended credit - to - gdp ratio, turned negative around 2010 and has remained so ever since ( figure 7 ). the same is true of the euro area overall. figure 8 shows a cyclical indicator that combines information on housing and financial prices and on credit aggregates. the indicator shows that the euro area is lagging behind the united states in terms of financial recovery, and that cyclical conditions in europe are still mildly negative. this does not mean that risks may not be rising in individual countries or sectors, but nor does it signal “ excessive risktaking ” in the aggregate. the second issue is what to do if and when the indicators signal an increase in systemic risk. my answer is that macroprudential policy should be used as the first line of defence. of course, monetary policy can also play a role, but the debate on what exactly this role should be is far from over. monetary policy has the advantage that “ it gets in all of the cracks ” of the financial system ( stein 2013 ), but it might also be a blunt instrument, as the benefits of fixing sectorial imbalances through it may be offset by large macroeconomic costs ( svensson, 2015 ). macroprude