jose manuel gonzalez - paramo : monetary policy in unconventional times closing remarks by mr jose manuel gonzalez - paramo, member of the executive board of the european central bank, at the colloquium “ monetary policy in unconventional times ”, frankfurt am main, 16 may 2012. * 1. * * introduction ladies and gentlemen, we are approaching the end of this colloquium on “ monetary policy in unconventional times ”. we have heard many interesting and stimulating presentations and i would like to heartily thank everybody who participated in our lively and constructive debate. let me close this event by adding a few personal thoughts on the two key issues that we discussed today : the non - standard monetary policy measures and the interaction between monetary policy, fiscal policy, and financial stability. 2. non - standard monetary policy measures : what have we learned? i still have vivid memories about the liquidity - providing fine - tuning operation with full allotment that we conducted on 9 august 2007 to avoid the equivalent of a seizure in the euro interbank money market. after almost five years, we still have this kind of measures in place and the crisis is still on - going. yet, we can already draw some lessons from our experience with unconventional monetary policy. when i try to define the general objectives of these measures, i think of two common characteristics : first, our non - standard measures address market dysfunctions and an impaired monetary policy transmission mechanism. from this perspective, non - standard measures are a complement rather than a substitute of standard monetary policy, as also illustrated by recent academic work. 1 more specifically, these measures address two types of liquidity problems – market liquidity and funding liquidity – by means of a third kind of liquidity, the one offered by the central bank. in fact, markus brunnermeier and his co - authors have impressively shown in a seminal paper that, if left unchecked, a dry - up of market liquidity and funding liquidity can be mutually reinforcing and lead to a hazardous downward spiral. 2 for instance, the securities markets programme and the covered bond purchase programme have helped to reduce the liquidity risk in the government bond and the covered bond market, respectively. from this viewpoint, one could even argue against the qualifier of “ non - standard ” for these measures : by implementing them, the central bank acts in its traditional role of liquidity provider, compensating for the sudden dry - up of private liquidity. second,

##s on and with uncertainties in the financial system of japan looming large in the background. 24. the higher interbank interest rates for the hong kong dollar could also be attributed to a realization on the part of the banks of the need to be a lot more careful in their funding strategies. on the one hand, they might have mistakenly provided cheap funding to finance speculative shorting of the hong kong dollar by their customers. in doing so they put themselves in a difficult position when the interbank market tightened to beyond their expectations implicit in the pricing of their lending to the speculators. on the other hand, the contagious nature of financial turmoil with globalized financial markets is such that the possibility of further attacks on our currency, unsuccessful as they inevitably would turn out to be, could not be dismissed. the banks have therefore been somewhat reluctant to lend longer term money in the interbank market since the october shock, even though they are flushed with liquidity, as reflected by the clearing balance of the banking system being at a high level. this perhaps reflects a lack of depth in the debt market which we have been separately trying to address. as a result, while the short term interest rates of the hong kong dollar, for example for overnight money, have fallen to quite low levels, significantly below corresponding us dollar interest rates, the yield curve has become sharply upward sloping, with one - month and longer term money commanding a significant premium over corresponding us dollar interest rates. 25. but i believe the hong kong dollar yield curve will in time flatten further, as it has done so after the sharp hike on 23 october 1997. there will, nevertheless, be occasional jumps, as sentiment continued to be affected by events in other economies in the region and possibly beyond. interestingly, the higher interest rates have been attracting some inflow of funds into the hong kong dollar, as investors took advantage of the higher return and as borrowers chose to finance their activities by raising us dollars and switching them into hong kong dollars, being comfortable about a little currency mismatch given our strong commitment to the link with the us dollar. as a result, hong kong ’ s foreign reserves have continued to 19 foreign currency assets as at end of : us $ billion june 1997 july 1997 august 1997 september 1997 october 1997 november 1997 december 1997 january 1998 82. 9 81. 7 85. 3 88. 1 91. 4 96. 5 92. 8 98. 1 - 8grow, contributing further to the easing of