and of consumption and investment reaction to the cost of finance have both declined. as a result, the wage phillips curve became flatter and the investment - saving ( is ) curve has become steeper. several factors contributed, of course, to this development, in particular, increased inequality contributes to explain higher savings and lower consumption while shrinking investment opportunities linked to secular stagnation explains lower investment. according to the general risk return trade - off, it was to be expected that investors would demand higher returns to hold riskier assets. this can be illustrated by examining the evolution of the equity risk premium ( erp ) – the excess return that investing in the stock market provides over a risk - free rate – in advanced economies ( figure 1 ) 1 which implied an increase in the cost of equity 2 / 20 bis central bankers'speeches the upward trend in the erp began already in 2000 in the wake of the dot - com stock crash ( figure1, left - hand side ( lhs ) ). the ex - ante erp is the difference between the required stock returns and the risk free rate. by depicting the two components, it becomes clear that the increased erp resulted both from an increase in the earnings yield ( ey ) and a sharp decline in the risk free rate ( figure 1, right - hand side ( rhs ) ). note however the more recent ey decrease ( which corresponds to the inverse of the price - earnings ( p / e ) ratio ). this is already reflected in the recent decrease of the erp in the u. s. ( figure 2 ) 2. 3 / 20 bis central bankers'speeches the two relevant factors contributing to the decline of the risk free rate were the “ savings glut ” of the early 2000s, identified by bernanke ( 2005 ) 3 and the scarcity of “ safe assets ” underlined by caballero and farhi ( 2014 ) 4 after the crisis. furthermore, expansionary monetary policies were also responsible for the decline in nominal interest rates and for the impact on yields and risky asset prices via rebalancing effects, resulting from quantitative easing ( qe ). as expansionary monetary policy attempted to reduce the output gap it also helped to fill the risk gap. in order to successfully avoid a big depression, monetary policy had to lower interest rates until the zero lower bound was attained. the changes in the is and phillips curves have rendered the task more difficult along the way and put pressure on monetary policy

captured in a synthetic financial cycle index that outperforms credit - to - gdp gap measures in predicting systemic banking crises, on a horizon of up to three years. they also demonstrate how the financial cycle is different from the business cycle. based on this research, we conclude that financial variables ( credit volumes and asset prices ) in eu countries have historically exhibited higher average volatility than economic variables ( volume of activity in goods and labour markets, as well as consumer prices ). financial cycles have also exhibited a higher duration than business cycles on average. lastly, asymmetries appear to exist, whereby financial cycles tend to build up slowly and correct more abruptly. taken together, these findings have at least two policy implications. first, they establish a rationale for differentiated financial and macroeconomic policies, and are thereby fundamental to the newly established macroprudential policy area. policies targeting financial cycles, such as countercyclical macroprudential policies, can act as a powerful complement to policies targeting the business cycle, such as monetary policy. policy trade - offs may emerge in the short - run, as the propensity for such cyclical divergence seems to be greatest at short frequencies. second, the results present a strong case for a differentiated national application of macroprudential policies, amid a far from complete convergence of country financial cycles. this latter aspect is particularly compelling in a currency union with shared monetary policy, where macroprudential policies represent an additional and potentially powerful element to cushion conditions specific to member states. this underpins several principles that should guide macroprudential policy that i would like to address in the remaining of my remarks. hartmann, p., k. hubrich, m. kremer and r. j. tetlow ( 2015 ) “ melting down : systemic financial instability and the macroeconomy ” mimeo, february. allen, l., t. g. bali and y. tang ( 2012 ) “ does systemic risk in the financial sector predict future economic development? “ the review of financial studies, vol. 25, no. 10, october, pp. 3000 – 3036. giglio, s., b. t. kelly and s. pruit ( 2015 ) “ systemic risk and the macroeconomy : an empirical evaluation ”, nber working paper no. 20963, february. hiebert, p., i. jaccard, t. a. peltonen and