. however, indirect effects via lower global commodity prices could become quite pronounced. • increases in the us interest rates and investors'reduced appetite for risk could lead to significant widening of the emerging market spreads. liquidity in some markets could dry up causing spreads to widen further as investors would try to reduce their exposures. and currencies in the region could come under pressure to weaken as investors would try to exit certain markets. • contagion, which has been vanishing in recent years, could reappear as spreads would widen and investors try to beat others in their attempt to adjust their portfolios. related to this, the original sin could also return as countries would have increasing borrowing needs in the face of a deteriorating economic outlook and weaker fiscal balances. • one big question mark would be the role that credit derivatives might play in the propagation of the crisis. at the moment there is much uncertainty about the way credit risks have been distributed in the financial system and the issue who is their ultimate holder. possible problems in the credit derivatives market could spell further trouble for emerging market borrowers. these issues are analyzed in great detail in the forthcoming issue of the ecb's financial stability review that will be published any day now. • declines in stock prices and increases in bond yields could weaken domestic balance sheets. these factors, and a generally weaker economy, could put a strain on domestic financial institutions. • fiscal balances could be hit through many channels : weaker economy, higher debt service as a result of higher interest rates and possibly also weaker currencies. possible problems in the domestic financial systems could also force governments to incur additional liabilities. countries with sound fiscal positions and well - anchored inflation expectations might have some scope for countercyclical policies. such countries could also benefit from flexible exchange rates. however, in cases where the fiscal position is not sound enough, and if currency mismatches of debt would erode the potential benefits of exchange rate flexibility, there would be very little that the authorities could do after the onset of the vicious circle. this analysis underscores the urgency to tackle the remaining vulnerabilities before a crisis. specifically : 1 ) fiscal vulnerability needs to be reduced through more ambitious fiscal consolidation and further improvement in debt management practices. and 2 ) financial sector vulnerability can be reduced through enhanced supervision and by measures that support further development of deeper and more liquid markets. one challenge related to the financial sector is making domestic private sector balance sheets more resilient to potential

importance of a firm commitment to a medium - term inflation target. thank you for your attention, and i look forward to our discussion. references bernanke, b. ( 2024 ). forecasting for monetary policy making and communication at the bank of england : a review, bank of england, published on 12 april 2024. bernanke, b. and blanchard, o. ( 2024 ), an analysis of postpandemic inflation in 11 economies, piie working paper 24 - 11 brainard, w. ( 1967 ), uncertainty and the effectiveness of policy, american economic review 57 ( 2 ), 411 - 425. ecb ( 2021 ). inflation measurement and its assessment in the ecb's monetary policy strategy review, occasional paper series no 265, september 2021. 4 / 5 bis - central bankers'speeches ferrero, g., pietrunti m. & tiseno, a. ( 2019 ). " benefits of gradualism or costs of inaction? monetary policy in times of uncertainty, " economic working papers no. 1205, bank of italy. soderstrom, u. ( 2002 ). " monetary policy with uncertain parameters, " scandinavian journal of economics, wiley blackwell, vol. 104 ( 1 ), pages 125 - 145. 1 bernanke and blanchard 2024 : an analysis of postpandemic inflation in 11 economies. piie working paper 24 - 11 2 for further analysis and data, see the ecb blog, tracking euro area wages in exceptional times by sarah holton and gerrit koester, 23 may 2024. 3 for example, soderstrom ( 2002 ) and ferrero et al ( 2019 ) argue that elevated uncertainty about inflation persistence should lead to a more aggressive policy response in order to stabilize expectations. 5 / 5 bis - central bankers'speeches