of central banks and, in particular, of the european central bank. in this context, it is worth recalling that the ecb ’ s objective, tasks and responsibilities are clearly laid down in the eu treaty. the primary objective of the ecb – and the eurosystem as a whole – is to maintain price stability. furthermore, the ecb is to support the general economic policies of the union, aiming among other goals at sustainable economic growth, provided that this is possible without prejudice to the objective of price stability. there is, therefore, a clear hierarchy of objectives, and for good reason, as i will explain. the ecb and the eurosystem are also called upon to “ contribute to the smooth conduct of policies pursued by the competent authorities relating to prudential supervision of credit institutions and the stability of the financial system ” ( article 105 of the eu treaty ). the objectives of price stability and financial stability are interrelated and mutually reinforcing, in that both serve to create conditions which are a prerequisite for economic growth and prosperity. why should the preservation of price stability be the primary, overriding objective of monetary policy? both theory and history provide strong arguments and evidence to support this assignment. first, monetary policy, with the available instruments at its disposal, can control effectively the price level over the medium and longer run. second, by contrast, monetary policy cannot influence the level or rate of growth of aggregate output in a permanent manner ( or to any significant extent ). third, although in the short term a change in the monetary policy stance could affect economic activity under certain circumstances, such effects are uncertain, cannot be systematically exploited to stabilise the business cycle and there is a risk that a countercyclical monetary policy could be counterproductive and jeopardise the attainment of the price stability goal. most importantly, by establishing an environment of price stability, a central bank contributes in a fundamental, though indirect way, to sustainable economic growth, since in such an environment reduced inflation uncertainty, inflation expectations anchored to price stability and low levels of long - term interest rates foster sustainable growth. for all these reasons, the mandates of most central banks in the advanced economies give primacy to the price stability objective. it is interesting to note that a major central bank that has a dual mandate has emphasised in its communication some of the messages that i have stressed here, namely that price stability is a necessary precondition for growth. it is, therefore

affect the behaviour of market participants. in particular, i would like to stress four vulnerabilities that have been exposed and that stem from : ( i ) the lack of transparency in the broader credit markets, ( ii ) the valuation of structured credit products which are not traded frequently, ( iii ) the role of credit rating agencies, and ( iv ) specialpurpose investment vehicles that are highly leveraged. first, the lack of transparency in credit markets. in recent years, the market of credit risk transfer has facilitated a widespread sharing of credit risk across the financial markets which in general should enhance their efficiency and stability. nevertheless, the market turbulence confirmed previously expressed concerns about the risks stemming from the lack of transparency as to where credit risks ultimately reside in the financial system, that is, whether they have been acquired by market participants that can manage them properly and how imperfect knowledge of the distribution and concentration of risks can affect participants ’ behaviour and the liquidity of markets. second, structured credit products whose valuations are model - determined. even if risks are well dispersed across the system, in a crisis situation, a suspicion that some financial institutions could have exposures, event modest, to such assets for which no market value can be computed, can significantly impair the functioning of the market. third, the activity of rating agencies has recently come under particular scrutiny. the issues related to the very small number of rating agencies, the possible conflicts of interest and the lack of benchmarks clearly need to be addressed in order to provide optimal conditions for the efficient functioning of the complex and sophisticated global financial markets. what should be clear, however, from the current episode is that financial institutions should not rely exclusively on credit ratings for their risk assessments. fourth, special - purpose investment vehicles that are highly leveraged. the financial market turmoil has highlighted the vulnerabilities created by such, off - balance sheet, investment vehicles, namely that such vehicles have proven, in the context of mark - to - market accounting of asset pools, to be prone to liquidity mismatches between their assets and liabilities. these mismatches caused contingent credit ( and liquidity ) lines to be drawn on banks and resulted in the increased demand for liquidity by banks in the ( interbank ) money market. these four issues are only some of the lessons to be learnt from this episode of financial market turmoil ; there are others, pertaining, for example, to the liquidity risk management of banks. we need to carefully assess all