can maintain an admirable degree of price stability even when financial stability is under a lot of strain. do these two points mean that financial stability and monetary policy are not connected after all? no. they are very closely related. independence of monetary policy one of the lasting lessons learned in the last decades is the value of the independence of monetary policy. the independence of central banks has been essential keeping inflation expectations as well anchored as they have been in this crisis despite all the turmoil in the financial markets. independence has also made it easier for central banks to act quickly when it has been necessary in order to maintain financial stability. it is especially important to avoid two threats to independence : fiscal dominance and financial dominance. fiscal dominance is the older concept of the two. it would arise if the government financing constraint would become an overriding influence on monetary policy. the idea of fiscal dominance was formalized by tom sargent and neil wallace in 1981, but of course the worry that deficit financing may cause inflation has much longer roots in monetary thought. 1 the idea that tight monetary policy may become impossible without accompanying fiscal adjustment was also well understood when the blueprints for the emu were being prepared. this is why the maastricht treaty had its fiscal policy clauses and also why the stability and growth pact was concluded. also the prohibition of direct central bank credit to the sargent, t. j., and wallace, n. : some unpleasant monetarist arithmetic. the federal reserve bank of minneapolis quarterly review, 1981. bis central bankers ’ speeches government and the institutional independence of the central banks are in effect protections against fiscal dominance. now we know, of course, that the fiscal framework as put in place before the start of the emu was not strong enough to prevent fiscal problems from emerging. some have argued that fiscal dominance has taken hold in the in the big industrialized countries during the crisis when the central banks have used government bond purchases in order to stabilize the markets ( as the ecb ) or to produce additional monetary stimulus when the interest rate instrument has already been used to the maximum ( like the federal reserve and the bank of japan ). as to the euro area, for me there is now no evidence of fiscal dominance. fiscal dominance implies that monetary policy would break its price stability objective for the sake of maintaining the solvency of the government sector. this is not the case. price stability has not and will not be abandoned. we have well known fiscal problems in some of the euro area countries.

of these assets at the fed reached 2. 1 trillion dollars. in the second round, it bought another 600 bln usd. similar non - standard measures have been taken by the bank of england and bank of japan. the unconventional measures of the ecb in response to the crisis have been somewhat different. ecb ’ s tools focused on supporting liquidity and funding for the banking system. the ecb introduced the fixed rate and full allotment principle to all refinancing operations in october 2008. it extended collateral eligibility to less liquid assets. between 2009 and 2011, the longer - term refinancing operations ( ltros ) were extended to maturities of up to rajan, r. ( 2013 ), a step in the dark : unconventional monetary policy after the crisis. andrew crockett memorial lecture, bis, 23 june 2013. bis central bankers ’ speeches 3 years. the ecb also started a purchase program of covered bonds which are a key source of funding credit for private banks in many euro area countries. 2 most importantly, the ecb did not initiate purchases of government bonds. however, in 2010 – 2012 the ecb operated the securities market programme ( smp ), which amounted to sterilized interventions on public and private bond markets ( in practice only public ). this was done to to facilitate monetary policy transmission in countries that faced severe sovereign debt problems. the culmination of the eurozone crisis in mid - 2012 was tamed by the creation of the ecb ’ s omt ( outright monetary transactions ) program. i quote president draghi ’ s promise that “ within [ its ] mandate, the ecb is ready to do whatever it takes to preserve the euro ”. 3 omt is a conditional promise to buy in the secondary market without limit government bonds of selected euro area countries. omt has worked and remarkably, there has so far not been any need to activate the program. international spillovers liquidity support operations by central banks at different stages, explicit state guarantees to banks and expansionary policies succeeded in stopping the recession, which changed the course of developments in comparison to the 1930 ’ s. these unconventional policy measures were not implemented in a group of economically disconnected islands, but in a globalized world with synchronized financial cycles and few borders for capital. 4 it is therefore important to ask what the consequences of these new forms of monetary policy for other countries are and how strong are the potential spillovers. one new line of theoretical research points