a tighter selection of new firms during downturns, and slacker entry requirements when the economy is doing well. while this phenomenon is a stylized fact, its implications for the propagation and persistence of aggregate shocks have only been studied quite recently. moreover, the impact of recessions induced by financial rather than real shocks is still comparatively underexplored. today ’ s presentations will also cover these important issues, which have clear implications for policies to stabilize the business cycle. let me conclude with a few words on italy. its lack of business dynamism has been an important determinant of the sluggish productivity growth over the last 20 years according to most research in this field, much of which has been conducted by the bank of italy ’ s economists. from the mid - 1990s onwards, aggregate productivity in italy has grown at a significantly slower pace than in the rest of the euro area. total factor productivity ( tfp ) has been virtually flat, and yet at the same time the ict revolution and the ensuing globalization of production were exploding, helping most other economies to reap enormous benefits in terms of productivity and growth. the inability of italian firms to do the same is normally attributed to the large share of micro and small firms in the system : those firms invest less in innovation and technology adoption, and are more vulnerable to global competition. yet the small size of most firms is a dynamic malaise of the system, not a static one, and is caused by the lack of business dynamism. italian startups grow less and for a shorter period of time than new businesses in other oecd countries. they are poorly selected over their early years of life : exit rates are generally flat over the age distribution, meaning that less productive firms are not wiped out from the market when they are young. as a result, italian firms are older, smaller and less productive than those from other developed countries. the causes of this lack of business dynamism are manifold. italy holds negative records for some of the frictions i discussed before : judicial efficiency is particularly low and financial leverage is among the highest by international standards. we have several specific dysfunctions, such as widespread tax evasion, the political connections of entrepreneurs, and cronyism, all of which distort competition in the economy, and slow down creative destruction and firm churning, with negative consequences for aggregate growth. the structural reforms that are needed to put italy back on track should address these diverse and complementary issues in a bold and coherent

supply shocks, and translate all that into action as expressed in the prices of a bewildering array of debt, equity, and derivative instruments. varieties of errors while the market activities of traders and investors can importantly reinforce and strengthen the actions taken by the fomc in the pursuit of its broad macroeconomic objectives, they cannot replace the fomc. sometimes, believe it or not, they turn out to complicate, rather than advance, the cause of monetary policy. before i turn to the good the market does in complementing policy action, let me start by deflating the notion that an omniscient bond market always gets it right so as to render the fomc redundant. because many of the instruments in which you deal have long maturities, the judgments that have to be made to price them by necessity stretch well into the future. the scope for error can be large and the consequences costly. i think it is useful to separate the grounds for mistakes into two groups : market participants could be wrong about the economy, or wrong about policymakers ’ objectives. two examples can make this distinction clearer. for one, we know, after the fact, that most analysts misjudged the full extent to which unusual restraint on credit was exerting a drag on spending from around 1989 to 1993. essentially, both households and firms recoiled from the explosion of debt in the 1980s. they were burdened by high interest service and took steps to bring their balance sheets into a more sustainable configuration. lenders, too, had their own imbalances, brought on importantly by the real estate bust. among them, banks drew back from extending loans to a wide variety of borrowers, including businesses. in this environment, spreads of private over public rates widened in the market, and borrowers and lenders who went to depositories were confronted with far less favorable terms than they had grown accustomed to. while chairman greenspan and his fellow policymakers identified the credit crunch in a fairly timely fashion, it took some time to appreciate the full force of its power. by my reading, in the aggregate, market participants were slower on the uptake. thus, the policy easings of 1991 and 1992 were greeted with some skepticism as market participants apparently interpreted those actions as reflecting a lessened concern about inflation on the part of the federal reserve, rather than the appropriate response to a softening in aggregate demand. the effect of those mis - assessments was to produce a stunning steepening