see andrade, breckenfelder, de fiore, karadi and tristani ( 2016 ). due to black ( 1995 ) ; krippner ( 2012 ; krippner ( 2014 ) ; wu and xia ( 2016 ) ; for updated values calculated by wu and xia see http : / / www. frbatlanta. org / cqer / researchcq / shadow _ rate. cfm ; wu and xia curve. several methods to calculate the shadow rates based on different models of the yield curve produce different outcomes, which somewhat diminishes the practical usefulness of the concept. balance sheet measures have contributed to a major easing of euro area financing conditions and, through this channel, a more robust and sustained economic recovery. 34 given their effectiveness, what role should central banks ’ balance sheets play in the future? an important question is to investigate, in the case of a continued low inflation regime with low interest rates, whether a conventional monetary policy of using interest rates would be sufficient to address the next recessionary episode. using the frb / us model, reifschneider ( 2016 ) 35 analyses several scenarios and concludes that both forward ‐ guidance and qe would be necessary. beyond this justification, there are good arguments to preserve the instrument in the policy toolkit. they stem from structural changes that have occurred in financial markets. in particular the increased role of secured money market transactions ; the importance of a broad set of market rates beyond the overnight rate ; the growing relevance of non ‐ bank institutions in market ‐ based finance ; and finally, the scarcity of safe assets that affects the functioning of markets and the management of collateral. these arguments are behind proposals recently presented in jackson hole by duffie and krishnamurthy, and by greenwood, hanson and stein. 36 they stress the importance of the fed ’ s reverse repurchase agreement ( repo ) programme ( rrp ) through which it repos against cash securities it has in its balance sheet. the first group of authors advocate using the programme to involve more counterparties and to affect several interest rates, thereby contributing to a better transmission of monetary policy. recent internal work at the ecb also detects similar pass ‐ through imperfections in european markets. the second set of authors consider the necessity of central banks keeping a big balance sheet as a way to steer the supply of safe assets, particularly through rrp, to create very short ‐ term safe assets, fostering

for the attempt to create private “ safer ” assets whose value proved to be illusory at the first stressful situation. this shortage of safe assets facing a huge demand is one of the important causes behind the very low levels of government bonds yields. as caballero and farhi ( 2017 ) stated “ short ‐ term rates feature a widely noted downward secular trend and a sharp drop during the great recession. the evolution of the expected return on equity is markedly different : it features the same downward trend as the short ‐ term interest rate until the early 2000s but then remains more or less stable. the disconnect between a stable expected return on equity and a declining short ‐ term interest rate is particularly salient after 2002, and even more so since the beginning of the great recession. … the stark divergence between safe and risky expected rates of return is suggestive of an increased shortage of safe assets ”. 42 the disconnect between low rates of government bonds and the real rates of return of capital invested by non ‐ financial firms, indicates that any concept of natural rate of interest cannot simply be a result of the marginal productivity of real capital as wicksell and other neo ‐ classical economists believed. on the other hand, the excess of demand for official safe assets pushed up their prices i. e. lowered their yields until they reached levels near the zlb. when interest rates could no longer adjust down to establish market equilibrium, the adjustment variable became the output moving into a recession. at the international level, the loss of interest rates as an equilibrium variable made rendered the exchange rate the variable of interest which provoked a type of “ currency wars ”. 43 these explanations back the calls by krishnamurthy et al ( 2016 ) and greenwood et al ( 2016 ) for sizeable central bank balance sheets. unlike in the u. s. where the share of deposits in total bank funding has gradually declined, deposits and corporate bonds still account for the bulk of financing in europe, with abs and money ‐ like debt playing only a marginal role. in fact, the predominantly bank ‐ see constancio ( 2014 ). see pozsar ( 2011 ) ; claessens and ratnovski ( 2014 ) ; singh ( 2012 ) “ ; perotti ( 2013 ) ; pozsar ( 2014 ). see singh and stella ( 2012 ). see gorton and he ( 2016 ). caballero and farhi ( 2017 ). caballero, farhi and gourinchas