monetary policy and the build - up of financial risk the interaction between monetary policy and the amount of risk in the economy is not confined to the details of the collateral framework. it extends also to the interest - rate setting itself. unfortunately, most macromodels are not well suited to analyse the relationship between monetary policy and the build - up of financial imbalances. they generally assume that monetary policy works via the impact of the short - term policy rate on long - term interest rates and the exchange rate, possibly amplified by the so - called credit channel. however, recent research has challenged the traditional wisdom by suggesting that in reality there are other channels at work which are relevant to understanding the interaction between monetary policy and financial imbalances. 10 first, it has been suggested that policy rates would be crucial in their own right. the reason is that financial institutions normally tend to maintain very low spare capacity on their balance sheets – for cost reasons – making wholesale funding the only readily available source of funds to finance at the margin an additional unit of investment. the close association of money market rates to policy rates implies that the central bank has a direct grip on the marginal price of financial institutions ’ leverage. and leverage is one of the key factors that determine the amount of risk and the extent of vulnerability present in the financial system. second, it has been suggested that monetary policy works also via the so - called “ risk - taking ” channel, whereby low levels of policy rates tend to induce excessive risk - taking by financial institutions. 11 these new insights can shed light on the effects that very expansionary monetary conditions can have on financial imbalances, fuelling in particular the build - up of maturity mismatches via excessively low interest rates. and these insights also make clear the hazard to which the central bank is constantly exposed. if a liquidity crisis occurs, the central bank may have to step in and provide abundant liquidity to preserve the functioning of the transmission mechanism and counteract risks to price stability emanating from systemic instability. anticipating this policy response, the private sector may in normal times under - price the value of liquidity, which in itself increases the probability of a liquidity crisis in the future. see adrian, t., and h. shin, ( 2010 ), “ financial intermediaries and monetary economics ”, forthcoming in handbook of monetary economics, edited by b. friedmann and m. woodford ; borio, c., and h. zhu, (

is. no – it does of course get in all the cracks, but unfortunately, despite the ample central bank liquidity, loans in individual countries which should be granted are not being granted. the way qe works was once visualised as a marathon. how many kilometres have we run so far? we have come a long way since summer 2015. even though we have pushed back the end of the qe programme, we have already covered quite a distance. we can see the effects in lending, for instance, where figures have turned from negative to positive. but that ’ s still not enough. small and medium - sized businesses in particular no longer have financing as their primary problem, and that is very positive. the problems tend to be in other policy areas, for which we are not responsible. that ’ s why we are pushing so much for structural reforms. the ecb has a price stability objective of “ below, but close to, 2 % ”. is this objective still appropriate? the answer to this question is in two parts. does it make sense in times of crisis management to change your strategy? i don ’ t think that would foster confidence. however, it is indeed the case that it is more difficult to measure inflation today than it was 15 or 30 years ago. there are factors which we over - and underestimate when it comes to inflation. why? it is not so easy to distinguish between improvements in quality and increases in prices. that is especially true in the digital age. it has probably never been as difficult as it is today to establish how changes in consumer behaviour affect productivity and prices. we need further studies on all these issues. if you draw premature conclusions, you end up zigzagging around, which destroys confidence. confidence - building is the key precondition for us to return to a stable growth path. bis central bankers ’ speeches why, then, is the “ close to 2 % ” so important? an inflation goal of 1. 5 % would also suffice. prices are stable, so why is the ecb putting itself under pressure? we are, after all, a long way from japan - style deflation. there were deflationary risks. when these are accompanied by a recession, things get difficult. then you are permanently driving along the edge of the precipice and the risk of having an accident is greater. that ’ s why potential growth must be pushed up. but that is not a task for us ;