place. 6 dsge models are typically estimated and thus consistent with the data. they often reproduce the dynamic effects of changes in monetary policy interest rates that are observed in identified variable autoregression models ( vars. ) this is also the case for the dsge model developed in the directorate general research, the new area - wide model, is regularly used for counterfactual policy analysis. 7 at the same time, a good fit of the data is to some extent accomplished by dsge models through persistent shock processes, which questions the empirical validity of the model ’ s intrinsic propagation mechanisms. more importantly, dsge models do not always provide a plausible story for observed economic developments. for example, so - called “ technology shocks ” tend to play an overwhelmingly important role in accounting for the evolution of gdp, even when external data do not show any evidence of technological innovations. moreover, dsge models can only slowly be adapted to a new policy environment. the requirement of full internal consistency makes the incorporation of new features — be it a more granular financial sector, household heterogeneity or stronger nonlinearities — often very demanding. enhancements come with long gestation periods, sometimes limiting the ability of dsge models to speak to newly emerging policy questions, in a timely manner. in designing the new ecb - mc we have therefore started from the premise that, in the words of olivier blanchard, “ policy models ” cannot be expected to have the same tight structure as “ theory models ”. 8 we have decided to adopt a semi - structural approach inspired by two guidelines : 1 ) include financial frictions or financial mechanisms that could allow monetary policy shocks to be transmitted via channels that were absent before the crisis ; 2 ) adopt a more flexible and empirically - driven approach. the emphasis is on equation - by - equation fit, while the cross - equation constraints are mostly ignored because they do not impinge on the model ’ s ability to provide sound quantitative predictions. when introducing financial frictions, we have relied on a reduced form representation that is consistent with different theoretical micro - foundations. this more flexible, semi - structural approach allows us to model a wide range of banking and financial variables, going from bank lending spreads to term premia, without taking a stance on the exact theoretical mechanism linking them to the macroeconomy. at its core, the new ecb - mc model is designed along the lines of the federal reserve ’ s frb / us model. 9 the behaviour

##urers to look through the sharp spike in credit spreads. and the ma also served broader financial stability as insurers did not behave in a procyclical way, as they did not need to sell assets as market prices fell [ chart 6 ]. asset eligibility on the eligibility side, solvency ii requires that the assets backing ma eligible liabilities should be ‘ fixed ’. this fixity in the assets results in a higher level of confidence that asset cash - flows will be available as the liabilities fall due ; and hence that firms have largely mitigated credit spread exposures arising from being either forced sellers of assets or reinvestors of cash. it is for this reason that assets with prepayment risk are typically not suitable for inclusion in matching portfolios, unless they include suitable protection from the financial consequences of prepayment. we are mindful that being closely matched today does not mean that all is well for the run off of the liabilities. even for a fixed book of business, changes in demographic experience may result in divergence from initial expectations. therefore, it is important to us that firms regularly revisit their matching profile ; indeed that is why we have set out tests in supervisory statement 7 / 18 “ solvency ii : matching adjustment ” 4 to assist with assessing ongoing matching. this is another reason why even a well matched firm may need to turn over part of its portfolio over time, suggesting prudence is necessary when deciding how much ma benefit to claim based on its current matching position. https : / / www. bankofengland. co. uk / - / media / boe / files / prudential - regulation / supervisory - statement / 2018 / ss718. pdf all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice in our view the ma does not stop firms investing in assets such as construction phase assets structured as debt, or in pools of assets that might not be ma eligible themselves. as i said earlier, ma portfolios already include many types of debt instrument, and where assets are not ma eligible firms may consider – if appropriate – holding them outside the ma portfolio to back other liabilities. and the pra has taken, as far as possible, a pragmatic approach to fixity – for example for floating rate bonds and for assets with inadequate modified spens clauses. over 2020, we saw very few applications for asset classes not