9  A recent paper, by Charlie Bean, Matthias Paustian, Adrian Penalver and Tim Taylor, “Monetary policy after the fall”, Federal Reserve Bank of Kansas City Annual Conference, August 2010, shows that the monetary policy instrument and macroprudential instrument (a lump-sum levy/subsidy on the banking sector) are not perfect substitutes in a sticky-price New Keynesian macroeconomic model with a banking sector. 10  Charlie Bean et al, ibid. BIS central bankers’ speeches  9  The overlap between macroprudential and monetary policy is one rationale for giving the central bank a prominent role in the setting of macroprudential policy. In addition, many central banks already have some of the analytical skills that will be needed for conducting the policy. However, greater analytical capacity will need to be built up. Analytical tools must be developed to guide policy While we know that there is an overlap between macroprudential policy and monetary policy, we lack models that describe the relationship in much detail. It is a difficult task for a number of reasons: (a) in the models currently used by central banks, financial sectors are poorly modelled, so it is difficult to introduce financial instabilities; (b) developments in financial markets are sometimes driven by psychology, which is difficult to replicate in models with rational agents; (c) the risk of a crisis cannot be modelled in the usual way, as it is more like an extra channel in the transmission mechanism; and (d) policymakers want models that can give them guidance on when to act, which is extremely challenging.
The objectives, transmission mechanisms and effects are still being established, and this is an area where the ESRB’s systemic macro-prudential oversight is playing an integral role. Conferences such as today’s can provide crucial input here. 4  BIS central bankers’ speeches  Overall, I am optimistic that macro-prudential policies, if properly coordinated at the European level, will strengthen our defences against future financial instability in the euro area, while also addressing some of the side effects that come from a single monetary policy. Conclusion Let me conclude. With the three challenges of: (i) ensuring price stability in the face of a prolonged period of low inflation, (ii) setting up the SSM and rebooting the banking system to support credit and growth, and (iii) establishing an effective macro-prudential policy framework to increase resilience in the face of future financial turbulence, the ECB will have its hands full in the coming year. We are committed to doing our job, but do not expect us to do the job of others. It is more important than ever that, in parallel, governments continue to pursue their structural reform agenda. The return of confidence in the euro area is evidence that the reform efforts will eventually pay off. This is visible from the return of market confidence. But, more importantly, it is visible from the return of political confidence – as expressed, for example, in Prime Minister Helle Thorning-Schmidt’s assessment that joining the euro would be in Denmark’s best interest.