, the economy ’ s natural rate of interest, cannot be observed in reality, but only, in the best of cases, estimated indirectly. accordingly, the central bank needs to analyse a broad range of indicators in order to infer the state of the economy, so as to be able to determine the appropriate monetary policy stance. this conceptual framework worked satisfactorily during the 1990s and the early years of the current century, a period known as the “ great moderation ”, characterised by stable growth in the advanced economies and relatively low levels of inflation. however, the economic and financial crisis that began in 2007 - 2008 forced central banks to adopt innovative policies and, on occasion, to navigate “ uncharted waters ”. this is the subject i wish to talk about in the final part of my speech. the monetary policy challenges arising from the crisis the magnitude of the crisis that began in 2007 - 2008 led the central banks of the main developed economies to design and implement expansionary monetary policies of unprecedented magnitude and scope. the crisis had a significant effect on banks and other financial intermediaries, leading to a contraction in credit and, therefore, in economic activity. this led the main central banks to introduce various measures to provide liquidity to their banking systems at times of market malfunctioning. in addition, asset purchase and medium and long - term financing programmes were launched that avoided a systemic crisis which would have led to the failure of a large number of banks and, undoubtedly, to an enormous crisis in the real economy, as during the “ great depression ” in the 1930s. even so, the severity of the recession led to a very sharp contraction in demand, and ultimately to inflation rates that were too low and incompatible with the mandate of the central banks of the main advanced economies. this situation forced them to reduce the interest rates determined by monetary authorities to historic lows. some central banks, such as the ecb and those of japan, sweden, denmark and switzerland, reduced rates to negative levels. 5 / 7 in fact, one of the factors that has influenced the actions of central banks most in recent years has been the difficulty of reducing interest rates when they are already at very low levels. interest rates that are too low may mean that there is no incentive for financial intermediation, since, for example, it is more profitable to store money in cash than to deposit it in the banking system. what should we do then when rates are very low and the economy still requires

16. 06. 2017 speech by the governor of the banco de espana at the 2017 cunef graduation ceremony luis m. linde governor it is an honour to be here with you today, to celebrate the cunef university 2017 graduation ceremony for graduates and postgraduates. allow me to congratulate all those who are graduating today, and to express my gratitude for the invitation to preside over this ceremony, which it has been a great pleasure to accept. since its foundation more than 40 years ago, cunef university has played a very important role in the education of banking and finance professionals in spain. cunef graduates occupy important positions not only in the private sector but also in the public sector, including in the institution that i represent. and i am sure that the students graduating today will maintain the tradition of professional excellence built by this university. i would like to focus today on what is, without a doubt, the key function of central banks : monetary policy. i will start with a brief historical outline of how the functions of central banks have changed from when they were first established up until the present day, and i will then describe the current framework for monetary policy implementation, concluding with some reflections on the main challenges we face following the economic and financial crisis that broke ten years ago this year. the evolving role of central banks central banks are offspring of the enlightenment. the first two central banks, the sveriges riksbank and the bank of england, were founded in the second half of the seventeenth century. the banco nacional de san carlos, the first forerunner of the banco de espana, was founded during the reign of charles iii, the enlightened, in 1782, and the banque de france opened its doors in the year 1800, shortly after the coup of 18 brumaire, which brought napoleon to power. central banks were initially set up to satisfy european states ’ demand for funds, to pay for their increasingly costly armies. the banknote issuance monopoly, which most central banks enjoyed from their foundation, was the main feature that distinguished them from commercial banks. until the first world war, the operations of central banks were linked to the gold standard. the interwar period was marked by a number of economic disasters, such as the hyperinflation in germany and the great depression in the united states, partly associated with the attempt to adapt the role of central banks to the new political realities. the post - war world was marked by the bretton woods agreements,