##s and e. carletti ( 2012 ), “ asset commonality, debt maturity and systemic risk ”, journal of financial economics, vol. 104, pp. 519 – 534. bis central bankers ’ speeches common asset exposures. depending on the structure of the network, even small shocks to central hubs in the network can result in serious propagation throughout the system. in most cases, during normal times, financial network structures are typically fairly robust to shocks and thus allow for a better diversification of risk. however, this notwithstanding, shocks to particular elements of the network can trigger major contagion within the system. this is a key feature of the so - called “ robust yet fragile ” complex networks ; also alluded to by doyne farmer this afternoon. 8 from a broader financial stability perspective, it is however not sufficient to be able to monitor systemic risks and their potential spillover effects within the financial system were they to occur. financial stability analysis, and macro - prudential policy actions, is as much about assessing the implications of ruptures in the financial system on the wider economy. from this viewpoint, the development of macro - financial models linking financial instability and the performance of the economy is of the essence. the global financial crisis has revealed important deficiencies of the standard macroeconomic models in capturing financial instabilities. realistic characterisations of such instabilities include bank defaults, financial market illiquidity, extreme events, and related non - linearities. especially, the modelling of bank defaults within a general equilibrium framework is crucial to allow for a proper characterisation of financial instability. however, none of these elements feature in the macroeconomic models regularly used for forecasting and monetary policy analysis and only recently has more emphasis been given to better developing the role of financial sectors in these models. another fundamental link which until recently has been missing in macro - financial models is to allow for heterogeneity, and interlinkages, between the agents within the financial sector. against this background, efforts by economists such as gertler and kiyotaki to incorporate interbank markets within dynamic stochastic general equilibrium ( dsge ) models are much welcome. 9 also worth noting is the model by goodhart, kashyap et al which includes the presence of a shadow banking system holding securitised assets issued by the traditional banking system that are subject to default. 10 a lot of attention, for example illustrated in the analysis by

the detriment of its primary role. having said that, does this mean that we ignore sectoral, regional or country - specific information? not necessarily. first, the ecb and the eurosystem devote a large effort in gathering and analysing disaggregated evidence, and we intend to do this even more in the future. but, i should stress that our efforts in this regard are made with the clear idea that such disaggregated analysis helps us to have a better understanding of the aggregate area - wide picture, taking into account all the complex linkages between the euro area regions and countries. to the extent that price formation processes might be different across economies, it is useful for monetary policy to consider the size, persistence and determinants of inflation differentials when assessing the area - wide inflation dynamics. furthermore, in our communication with the public, the explanations of the monetary policy decisions are framed in terms of the area - wide assessment. we see this practice not only to be in line with our mandate but also instrumental in fostering public awareness of the euro area as a new entity. second, as part of the evaluation of our monetary policy strategy in may 2003, the ecb also took into consideration the implications of persistent inflation differentials across countries when reviewing the area - wide inflation objective. from the analysis of the available evidence in this regard, we concluded that our aim of maintaining the euro area inflation rate below, and close to 2 % also provides a sufficient safety margin for avoiding that individual countries might have to structurally operate at negative inflation rates. finally, the ecb pursues its objective with a medium - term orientation. this means that we can tailor our monetary policy response by taking into account the nature and the persistence of economic shocks, and ensures flexibility for individual economies or sectors to adjust gradually also in the face of asymmetric shocks. fiscal policies in emu, fiscal policy is potentially useful in responding to economic fluctuations, as it is an instrument in the hands of the national governments and thus can be tailored to macroeconomic developments that are specific to the country. however, given the considerable time lags, discretionary fiscal measures are not well suited to fine - tuning in the short run. the free operation of automatic stabilisers can help to cushion economic upswings and downturns. in this way, government spending and revenues can absorb part of the deviation from the structural economic growth path. creating the conditions for an appropriate play of automatic