economic crises that centred on the mutually reinforcing effects between over - indebtedness and deflation. 5 according to this view, over - indebtedness beyond some point triggers distressed asset sales as debt is called in. this leads to abrupt deleveraging and a contraction of the amount of money in circulation. the destruction of money precipitates a fall in the general price level. deflation in turn causes the real debt and interest burden to go up, thereby triggering a new bout of distressed asset sales and deleveraging and trapping the economy in a vicious circle. deflation poses risks to the economy that – in some respects – are even more intractable than inflation. it is for this reason that the governing council ’ s definition of price stability rules out negative inflation values. moreover, the governing council ’ s policy aim ( within the range of positive inflation rates that are consistent with price stability ) is sufficiently close to the upper bound of the range to stave off the risk that negative price shocks may unleash a self - reinforcing downward inflation spiral. but engineering financial repression in order to facilitate balance sheet adjustment would clearly violate the mandate to maintain price stability as a primary objective conferred upon the ecb by the treaty. earlier in my remarks i referred to the central bank ’ s steering of inflation expectations as an illustration of the notion of control. moreover, i mentioned that the steadfast pursuit of the fisher, “ the debt - deflation theory of great depressions ”, econometrica, vol. 1 ( 4 ), 1933, pp. 337 – 357. bis central bankers ’ speeches central bank ’ s mandate exemplifies the notion of courage. i am very sceptical whether increasing the numerical definition of price stability helps in either of these dimensions. engaging in communication regarding the future path of policy rates let me now turn to the second example of an innovative proposal for monetary policy that i would like to discuss today. unlike the previous proposal, this one does not relate to the objective of the central bank. instead, it focuses on how the central bank can actually achieve its assigned objective, when the chances that the objective will be hit diminish. as i already mentioned, central banks typically conduct monetary policy by steering nominal short - term interest rates. these are the rates over which they can exert significant influence through the monopoly supply of central bank reserves. it is, however, widely accepted that it is primarily long - term interest rates

risk and this is part of the reason that we have allowed for early repayment of our 3 - year long - term refinancing operations. this way, when a counterparty judges that its chances of accessing market funding are being constrained by its use of ecb 3 - year long - term refinancing operations, it can repay all or part of the amount borrowed earlier than its original maturity. in fact, tomorrow is the first opportunity to make bis central bankers ’ speeches use of the early repayment option. euro area banks have taken this opportunity and have informed us that they will repay €137 billion of the slightly more than €1 trillion outstanding in such long - term operations. we will exert vigilance to ensure that – notwithstanding the legitimate decisions of individual banks to reduce their liabilities to the central bank – the overall liquidity conditions prevailing in the money market will remain consistent with the degree of accommodation that the current outlook for prices and real activity warrant. whichever of the two approaches a central bank decides to use, it needs to be well appreciated that there are limits to what monetary policy alone can achieve. delivering accommodative financing conditions and ample liquidity to the banking system has been necessary to avoid an abrupt deleveraging that could tip the economy into a destructive deflationary spiral. but parts of the banking system remain overstretched and this needs to be addressed in order to move decisively out of the crisis. similarly, structural reforms need to be undertaken in order to restore the competitiveness of euro area economies. only such reforms can deliver a lasting reversal of the fragmentation phenomena that the euro area has witnessed. and clearly neither of these tasks can be taken up by monetary policy. conclusion let me conclude with a cautionary tale. innovation is the quintessence of entrepreneurship and a cornerstone for economic growth and prosperity in market - based economies. but there can be innovations that create more problems than the ones they were originally conceived to address. i am reminded of the two mortal sins of economic policy - making that clearly transpire when reading carmen reinhart and kenneth rogoff ’ s excellent book on financial crises : arrogance and ignorance. 8 transposing this insight to the discussion on monetary policy frameworks, i would say that it is dangerously arrogant to believe that one ’ s current approach to monetary policy is perfect and no improvements or changes will ever be needed. certainly, before the crisis, a certain degree of academic group thinking and central bank