monetary policy needs to deal with asset price bubbles, which have often been linked to financial stability concerns. as is generally accepted, bubbles are situations in which the prices of various types of assets differ from their fundamental market values. asset price bubbles originate in the existence of imperfect information in financial markets, leading to the mispricing of assets and, in turn, to the distortion of investment and consumption decisions. often, asset price bubbles occur in an environment of regime shifts, prompted by major technological innovations, which gave rise to the belief among a broad spectrum of economic agents that a new era had started. in this respect, the impact of the “ new economy ” on stock prices that we have experienced in recent years has not been that exceptional. however, the importance of asset price bubbles and their potentially distorting impact on economic and financial processes does not mean that central banks should make asset prices an explicit goal for their monetary policies. this idea has been refuted by many, and rightfully so. asset prices are predominantly driven by real factors such as technological and demographic developments and preferences, which cannot be controlled by monetary policy. furthermore, economic agents should not be given any cause to act on the basis of expectations that central banks would insure financial markets against considerable losses. otherwise, there would be serious moral hazard problems and the public would hold the central banks accountable for specific developments in financial markets such as the performance of the stock market. this might seriously impair the central banks'goal of pursuing price stability, and thus their credibility. central banks also face considerable problems in terms of identifying financial bubbles. after all, a bubble can only be confidently identified as such once it has burst. j. e. core, w. r. guay and d. f. larcker, “ executive equity compensation and incentives : a survey ”, federal reserve bank of new york, economic policy review, april 2003, pp. 27 - 45. a. greenspan in his testimony before the committee on banking, housing, and urban affairs, u. s. senate, 16 july 2002 ; see also a. greenspan, “ stock options and related matters ”, remarks at the 2002 financial markets conference of the federal reserve bank of atlanta, 3 may 2002. p. maidment, “ in nothing we trust ”, forbes magazine, 7 january 2001 ; f. fukuyama, “ trust : the social virtues and the creation of prosperity ”, free press, 1995. f. fukuyama,

the productivity statistics ”. the difficulty in interpreting these developments therefore suggested caution on the part of policy - makers. the interaction of the “ new economy ” with developments in financial markets let me now turn to the interaction of the “ new economy ” with financial markets. it has been long debated what role the development of financial markets played in fostering belief in the “ new economy ”. in most industrialised nations, on the waves of financial liberalisation and globalisation, capital markets have been growing tremendously over the past two decades, both in terms of volume and value of transactions and in the development of new types of securities. for the euro area, the preparations for and the actual introduction of the euro have undoubtedly been an important catalyst, improving the efficiency of the euro area capital markets and, to some extent, reducing existing information asymmetries, for both the equity and debt markets in the euro area. this has certainly been a very positive development which i wholeheartedly support. coinciding with the stock market boom in the late 1990s and 2000, corporations in the euro area raised significant amounts of equity capital. new companies, often in the high - tech field, obtained listings at specialised “ new markets ” stock exchanges for high - growth companies. the amount of new capital raised on euro area stock markets increased from €130 billion in 1998 to €320 billion in 2000, when stock prices were at their peak. the growth of the euro area stock markets, in terms of the ratio between market capitalisation and nominal gross domestic product, has been staggering. over a period of ten years, from 1990 to 2000 - when prices were at their highest level - this ratio increased about fourfold. with the benefit of hindsight, the belief in enormous potential profits stemming from investments in “ new economy ” corporations resulted in a stock market rally, which broke all previous records. valuations of internet - related companies reached levels that were extraordinary by basically all standards. in march 2000, the monthly average price - earnings ratio of stocks in the technology, media and telecommunications sectors peaked at 70, compared with an average of around 13 over the previous 25 years. it seemed that the sky had finally become the limit indeed and that a new era had arrived. in parallel with the rise in stock prices, stock market volatility jumped : the historical volatility of the nasdaq composite index almost doubled from 1999 to 2000. the excesses, which were particularly evident in the stock markets, are the