axel a weber : monetary policy after the crisis – a european perspective keynote speech by professor axel a weber, president of the deutsche bundesbank, at the shadow open market committee ( somc ) symposium, new york city, 12 october 2010. * 1. * * introduction ladies and gentlemen it is a pleasure to be here and to speak to such a distinguished audience. hence, i would like to thank the organisers for their kind invitation. the shadow open market committee, founded by allan meltzer and karl brunner in 1973, can look back on a long and impressive history. the committee has also served as a role model for establishing similar bodies in europe. karl brunner was a visiting professor at the university of konstanz from 1969 to 1973. regrettably, i missed his lectures at the time since i did not start my economic studies at the university of konstanz until a few years later. both his teachings and his research established the reputation of konstanz as the german centre for monetary research and as an “ incubator of german monetarism ”. 1 the “ konstanz seminar on monetary theory and policy ”, which he also founded and where i met him later, has maintained its status as an exclusive forum for promising young economists and attracts a constant flow of very distinguished monetary experts ; it celebrated its 40th anniversary last year. i have enjoyed attending the seminars for more than 30 years. beyond that, karl brunner ’ s work has had a major impact on policy in germany – something which is strikingly illustrated by the introduction of monetary targets by the deutsche bundesbank in 1973. in the konstanz scientific manifesto of 1972, karl brunner wrote on the division of “ monetary theory ” and “ monetary policy ” as distinct academic subjects : “ … theory without application to our environment is useless and policy discussion or judgements not based on analysis are dangerous ”. 2 over the past four decades, fortunately, both subjects have converged to a large extent, and modern monetary policy has become unthinkable without a state - of - the - art theoretical background. having said that, i would like to focus on current und future challenges facing monetary policy, in particular as regards the euro area. 2. a brief review of the eurosystem ’ s response to the crisis central banks in the euro area and in many other industrialised economies had to take bold and decisive action in order to limit the

which in many cases continue to build on the assumption that the pre - crisis environment will return – are still a drag on the resilience of the financial system. thus, while finance - led growth might be intuitively appealing, pursuing it once again would seem to fit our definition of insanity above. 3. how much is enough? more finance is not a panacea nevertheless, policymakers are looking for solutions. unfortunately, some still think that more finance is a sound way to ignite investment and development. such a finance - led growth policy emerged as the dominant political strategy in the 1980s. that meant that financial deregulation was high on the agenda to foster financial development. and theory appeared to support this intuition, with studies showing that financial development corresponded strongly with economic growth. 4 but, while finance seemed to be conducive to economic growth in the early stages, it also had serious negative repercussions for the economy. we learned the hard way that more finance is not a panacea! for two reasons : first, more credit and finance tend to lead to more frequent and more severe financial crises. 5 excessive credit creation increases the fragility of the imf world economic outlook, update april 2016. see also mckinsey ( 2015 ), debt and ( not much ) deleveraging. r levine ( 2005 ), finance and growth : theory and evidence, in : handbook of economic growth. a turner ( 2015 ), between debt and the devil : money, credit, and fixing global finance, princeton university press. bis central bankers ’ speeches financial system and the likelihood of financial crises. and the bigger the mountain of debt, the more severe post - crisis recessions tend to be. 6 moreover, financial turmoil is not the sole possible outcome of excessive debt. the second reason why more finance is not a panacea is that leverage seems to hamper economic growth once it exceeds gdp levels of around 90 to 100 per cent. recent evidence reveals that there is indeed such a thing as too much finance. 7 financial depth starts having a negative effect on output growth once credit to the private sector reaches 100 per cent of gdp. most advanced countries exceeded this level prior to the financial crisis – and continue to do so. recent studies found even lower thresholds at which financial deepening unleashes negative effects. in a bank for international settlements working paper, cecchetti and kharoubi found that the effects of credit on gdp growth turn