. however, while financial innovation has undoubtedly increased vulnerabilities in the global financial system, there is more to the present financial market turmoil than the proliferation of structured finance products. the “ originate and distribute ” model would arguably not have been possible without the benign economic and financial backdrop notably robust global economic growth, low inflation, a low level of interest rates, low default rates and rising asset prices in many countries, not just in the usa. this goldilocks economy, where conditions were neither “ too cold ” nor “ too hot ”, had – as a side effect – masked the gradual build - up of financial imbalances ; a development many of us have seen already before the turmoil. and the bis is one very prominent example that made this very clear already at an early stage of the process. hence, while lending and risk - taking experienced rapid growth, words of warning from central banks and other institutions largely went unheeded with the argument that “ this time, developments are surely different from the past ”. the fact that minor financial market tensions in the spring of 2005 and 2006 had left financial markets more or less unscathed only served to reinforce that impression. however, once the vulnerabilities in the global financial system were revealed in august last year and financial imbalances started unwinding, we all witnessed that the environment had changed considerably since then. recent financial market tensions : lessons for monetary policy the list of lessons to be learnt from the current financial turmoil covers many areas. i do not want to discuss in any detail the many proposals that are currently being debated in different national and international bodies. as the g - 7 finance ministers and governors have recently stated, it is important to recognise the need for more effective regulation. in that context we remain fully committed to the recommendations of the financial stability forum to improve the resilience of the international financial system. while i do not deny the importance of these aspects, in the following i would like to focus on an aspect that is more related to the general theme of today ’ s conference, namely the lessons to be learnt by monetary policy makers in their core business of setting short - term interest rates to safeguard macroeconomic stability. i therefore do not intend to describe the reactions of central banks to the current turmoil in terms of money market operations, but take a step back from this sort of crisis management to the more general issue of conducting monetary policy in the face of a procyclical behaviour of financial market participants. in

. rather, it means that central banks should take a longer - term perspective which takes into account the future inflationary consequences of such unfavourable developments. and indeed, empirical work pioneered by the bis has found that excessive money and credit growth has significant leading indicator properties for sharp corrections on asset markets and severe repercussions on the rest of the economy. as financial crises increase the volatility of macroeconomic variables such as inflation and growth, and given that monetary policy operates under the traditional loss functions, these results indicate that a more symmetric policy would improve welfare and macroeconomic stability. moreover, it could be argued that the variance of macroeconomic variables itself is not independent of the monetary policy strategy chosen. a more symmetric monetary policy approach to financial cycles therefore has an additional endogenous impact. given the macroeconomic relevance of financial crises, we have good reason to widen our monetary policy time horizon and give low - frequency movements in credit and monetary aggregates more weight in our analytical frameworks and our monetary policy decisionmaking processes. that is not to say that such an approach would eliminate financial cycles altogether. however, in the medium to long term, a monetary policy that followed a more symmetric course would do more to dampen damaging financial cycles than a monetary policy that merely tries to limit damage after the event using aggressive interest rate measures. given that the eye of the current storm is the us real estate market and that the us federal reserve is well known for actively pursuing a risk - management approach, it comes as no surprise that most debates currently focus on us monetary policy. but given the prolonged period of low interest rates in the euro area over the past couple of years, these issues must also be addressed by monetary policy makers in the eurosystem. here, the eurosystem ’ s monetary policy strategy already possesses, in the shape of its monetary analysis, such a stabilising element, which is especially suited for the analysis of long - term developments. the recent financial turmoil has shown that the often criticised monetary and credit analysis has a valuable role to play in monetary policy analysis. mtm and financial developments the relationship between monetary policy and financial markets, however, is by no means one that is of interest to policy makers only in the face of a crisis. developments on financial markets have the potential to modify core economic relationships and are therefore of utmost interest for monetary policy. let me therefore move away somewhat from the recent stress episode to discuss other structural issues related to financial innovations and monetary policy