the borrowers as well as those of the lenders. no wonder that developing a sound legal system to support financial markets is a very complicated matter and we hope to learn something from today ’ s conference. 2. legal systems and competitiveness of financial centres fundamentally, the legal system should ensure that contract and property rights are sufficiently clear and predictable ; if there is a dispute, participants in the contract do not feel i wish to thank l. stracca, m. svoboda, s. kerjean, f. recine and c. zilioli for their contribution. mishkin ( 2005 ). precisely through its negative impact on the quality of institutions and law enforcement. the need to take legal action unless as a last resort. moreover, if there is litigation, the court is independent and able to resolve the claim effectively and in a reasonable time. furthermore, the judgment, once delivered, has to be quickly enforced. to underline the importance of this aspect let me give the example my own country. there is a growing literature suggesting that one of the reasons for the relatively slow pace of financial development in italy is the slowness of the civil courts, with the result that, for example, mortgage debt is still a fraction of what it is typically in other advanced countries. 4 at this point it should be clear that an efficient legal system is a key ingredient of competitiveness among financial centres. one of the reasons of the traditional lead of us financial markets over europe ( and the rest of the world ) is greater standardisation of legal norms and systems, while the european financial system is still characterised by considerable fragmentation of legislation, regulation and enforcement. without a proper legal system, it becomes harder to trade in almost any financial instrument. two distinct effects may be considered. on the one hand, yields may rise and consequently asset prices fall. in other words, asset yields may incorporate a “ legal risk premium ”. it is interesting to note that under the basel ii system legal risk is a part of operational risk, which implies that it is taken seriously by the regulators. on the other hand, an inefficient legal system may simply lead business to move elsewhere, namely influence the quantities rather than prices. the importance of the legal environment was recognised most notably in the january 2007 bloomberg - schumer report, “ sustaining new york ’ s and the us ’ s global financial leadership ”, which reported that “ a firm and predictable legal environment was the second most important criterion

/ www. ecb. europa. eu / press / key / date / 2020 / html / ecb. sp201124 ~ bcaebee7c0. en. html 5 / 13 24 / 11 / 2020 covid - 19 and monetary policy : reinforcing prevailing challenges monetary policy and the interest rate hypothesis the interest rate hypothesis needs closer inspection on three grounds. first, an emerging literature suggests that monetary policy transmission may not be linear in the level of the interest rate. [ 10 ] in other words, the slope of the is curve may be different when interest rates are low, or when they have been low for a protracted period of time. evidence is too scant to draw definitive conclusions at this stage. but such non - linearities could affect the extent to which central banks can bring future activity into the present : researchers have dubbed this the “ macroeconomic reversal rate ”. second, the transmission of changes in policy rates to bank lending rates seems to weaken around the zero lower bound ( see right chart slide 5 ). [ 12 ] all else equal, the lower the pass - through of interest rate changes to bank deposit rates, the smaller the effects of monetary policy on aggregate demand. and third, people often cannot distinguish between real and nominal developments and may therefore react less to changes in real interest rates than what our models would tend to suggest. [ 14 ] although money illusion has long been recognised in the economics profession, it continues to be largely ignored in core central bank models. empirical evidence shows that money illusion affects financial decisions, particularly – but not only – those made by households, who often mistake changes in nominal interest rates for changes in real rates. recent experience suggests that money illusion may not only change the nature of the interest rate channel, it may also expose central banks to widespread criticism. the debate on the “ expropriation ” of savers is a prime example. many people may be surprised to learn that negative real interest rates are not a new phenomenon. in germany, for example, since the euro was introduced, the average real interest rate for savings and demand deposits has been roughly the same as the average over the preceding two decades ( see slide 6 ). slide 6 negative real rates are not a new phenomenon https : / / www. ecb. europa. eu / press / key / date / 2020 / html / ecb. sp201124 ~ bcaebee7c0. en. html 6 / 13 24 / 11