The result would be a systematic under-pricing of risk, leading to an increased likelihood of growing financial imbalances. Another important feature of the ECB’s monetary policy strategy which helps to address and mitigate financial imbalances is the prominent role we assign to monetary analysis.
Within the two-pillar framework, monetary analysis serves to cross-check from a medium to long-term perspective the assessment of price developments and inflation risks derived from economic analysis over a more short to medium-term horizon. Historical experience has shown that costly asset price crashes have often been preceded by asset price booms accompanied by brisk growth of credit and money.