and could in turn also constrain economic growth in that country. this is what i call the “ private costs ” of such behaviour. although in this case the lack of fiscal discipline is something which is strictly related to one country, this circumstance may still lead volatile financial markets to also lower their expectations about fiscal consolidation efforts in other countries. as a result, those other countries also begin to face costs in terms of significantly increased interest rates on their government debt. the social costs are in the end equal to the aggregate cost represented by the higher interest rates that the governments of all the other countries have to pay for their debt because of the fiscal irresponsibility of the original country. the difference between private and social costs implies a market inefficiency calling for some form of intervention whose objective is to internalise these kinds of externalities. in other words, the countries that pursue activities which risk causing contagion need to be constrained in pursuing such activities or “ pay a price ” which is proportional to the expected costs to the other countries which are affected by the contagion. this provides them with incentives to reduce the activities that could trigger contagion. given that the possibility of contagion is well known from the literature and economic history, we should mind about both the preventive and corrective policies. in the case of sovereign contagion preventive policy options would include, fiscal rules and governance mechanisms that avoid excessive deficits or high stocks of public debt. ex post policy options aimed at addressing the fall - out from sovereign contagion would include liquidity provision by central banks to financial markets, the recapitalisation of fragile banks and the swift implementation of growth enhancing structural policies and fiscal adjustment measures to regain market confidence in national economies and governments and offset the adverse effects of contagion. it goes without saying that – as a rule – prevention is by far preferable to addressing the problems that arise from contagion ex post. but i am afraid that the evidence of contagion that i will present to you in a moment illustrates that we no longer have the privilege of focusing on prevention alone. december ; o. de bandt, p. hartmann and j. l. peydro ( 2010 ), “ systemic risk : an update ”, a. berger et al. ( eds. ), the oxford handbook of banking, oxford university press. see de o. bandt and p. hartmann ( 2000 ), op. cit

inflation? 4 / 5 bis - central bankers'speeches since my first federal open market committee ( fomc ) meeting last june, my approach has been one of data dependence. it has also taken into account risk management, which concedes that the federal reserve cannot eliminate risks but can manage them. this data - dependent, risk - management framework has led me to support the fomc's response of rapid monetary policy tightening - - we have raised interest rates 475 basis points in a year to bring inflation under control. currently, with the federal funds rate target near 5 percent, i am looking at what rate will be sufficiently restrictive to bring inflation down to 2 percent, over time. i am weighing the implications of stronger momentum in the economy apparent in economic indicators over the past few months against potential headwinds from recent banking developments. if tighter financing conditions are a significant headwind on the economy, the appropriate path of the federal funds rate may be lower than it would be in their absence. but if data show continued strength in the economy and slower disinflation, we may have more work to do. in setting monetary policy, i continue to be guided by our dual - mandate goals of maximum employment and price stability. i, like my colleagues on the fomc, am committed to bringing inflation back to its 2 percent target over time, which will lay the foundation for sustainable strength in the labor market and the u. s. economy. thank you. 1 the views expressed here are my own and not necessarily those of my colleagues on the federal open market committee. 5 / 5 bis - central bankers'speeches