klaas knot : monetary policy responses to the corona crisis introductory remarks by mr klaas knot, president of the netherlands bank, at the eurofi financial forum, berlin, 11 september 2020. * * * a framework for central banks to assess the appropriateness of their policy decisions usually has three dimensions : necessity, effectiveness and side effects. it is important to view these dimensions in conjunction, as there are usually trade - offs involved, which may differ over time. in my introduction, i will elaborate on the dimensions and trade - offs in the current monetary policy setting. the necessity of continued monetary policy support follows from the mandate of the ecb, which states that price stability is the primary objective. it is beyond doubt that the extended monetary policy measures since mid - march have been needed to support monetary transmission and help the economy establish a foothold in the lockdown. this has contributed to avoid worst case scenarios and deflationary threats. the monetary policy responses to the corona crisis have clearly been effective. the ecb responded forcefully by employing a multitude of instruments, including the new pandemic emergency purchasing program. this has been effective in limiting the fall - out from the financial market stress and preserve the loose monetary conditions. moreover, the targeted ltros have been effective in safeguarding banks ’ funding liquidity. thereby, the emergency monetary policy measures have been an effective circuit - breaker to prevent bad equilibria. as we have moved to the recovery phase, the focus of the monetary measures has shifted to supporting inflation, by maintaining accommodative monetary and financial conditions. however, broad and encompassing policy response is important to ensure that we don ’ t rely overly on individual measures that could be subject to unintended side effects if they are kept in place for too long. for example, if central bank support remains in place for a prolonged period of time, debts accumulate and asset prices are further stimulated, posing risks to financial stability. instead, a sustainable recovery from the crisis also requires sufficiently productive public and private sector investments. and structural reforms that foster the creation of new firms, while non - viable firms are wound - down in an orderly fashion. though this can be a painful process for some sectors, the economy has to adjust to a world that might have structurally changed. monetary policy can maintain appropriate financial conditions to help the economy adjust, but other policy authorities will have to set the adjustment in motion. the eu recovery fund has the potential to contribute to this, if it

the music stopped. this partly makes the case for reconnecting supervisors and markets specialists in central banks. this is all part of getting the level of capital in the banking industry closer to what is warranted. adair has said a great deal about that this evening. but before coming to the associated international policy debates about the biggest and most complex firms, i want to go back to incentives. because whatever the merits of the riskmyopia argument i have been reviewing, we absolutely must not build a system that relies on dismissing the incentives argument. while i doubt that many bankers deliberately – that is to say, consciously – took outsized risks that crashed the system because they believed they would be bailed out, i do believe that their behaviour will have been profoundly affected by their cost of debt being too low because asset managers believed they would not lose money. asset managers held beliefs about the policy world that fatally diluted their incentive, as creditors, to monitor and discipline banks ( this is the too big to fail problem ). that brings me to the policy debate on resolution. those of us promoting enhanced resolution regimes, who include adair by the way, do so for two reasons. first, no one can guarantee that losses will not exceed equity cushions in the future and when that happens if the losses do not fall on bondholders – via resolution or the much more disruptive liquidation – they will end up falling on taxpayers. and second, exposing bondholders to risk has the potential to harness market discipline – or, as i have put it, to bring capitalism back into the heart of capitalism. that weighs with me both as a matter of principle, and because minds have been concentrated by the planned transfer to the bank of responsibility for micro prudential supervision of banks. a system in which our bank supervisors were the next line of adrian, tobias, and hyun song shin ( 2010 ), “ the changing nature of financial intermediation and the financial crisis of 2007 – 09 ”, annual review of economics 2 : 603 – 18. gorton g b and a metrick ( 2009 ), “ securitized banking and the run on repo ”, nber working paper 15223. see also shleifer ’ s comments on gorton and metrick “ regulating the shadow banking system ” bpea, fall 2010. bis central bankers ’ speeches defence after management would be badly designed. we need to set rules of the game that harness boards, shareholders, auditors and, in