I would submit that, in normal circumstances OFIs’ money holdings are unlikely to be transferred to non-financial agents and to generate an additional demand for goods and services. The reading of M3 developments, and its interpretation in terms of the risks to price stability, should, most likely, be adapted accordingly.   Financial innovation has also affected money and credit developments by making it easier for banks to hedge credit risk and manage maturity and credit mismatches. This may have supported the supply of credit, especially long-term loans to  Noyer, 2006b  BIS Review 42/2007  households, in recent years. Indeed, housing loans have grown at a rate of 9.8% per year in the euro area since the beginning of 1999.   In recent years, two innovations that may have an impact on the interest rate elasticity of money demand have emerged. One takes the form of high-yielding and highly liquid deposits accessible via direct banking or internet accounts. The second, which is still marginal, consists in the introduction of so-called “retail derivatives”, which are usually short-term deposits with embedded derivatives tailored to the needs of investors. Taking into account the effects of financial innovation is a clear challenge for monetary analysis. Meeting this challenge requires regularly updated tools and in-depth research based, in particular, on sectoral analysis. 2.
•  Noyer C. (2007), “Hedge funds: what are the main issues?”, Financial Stability Review, Special issue on hedge funds, Banque de France, 10, pp 105-111, April. •  Rajan R.G. (2005), “Has Finance Made the World Riskier?”, European Financial Management, 12 (4), 499-533. •  Rajan R.G. and L. Zingales (1998), “Financial dependence and growth”, American Economic Review, 88, pp 559-586. •  Thornton D.L. (1994), “Financial Innovation, Deregulation and the “Credit View” of Monetary Policy”, Review of Federal Reserve Bank of Saint Louis Review, pp 31-49, JanuaryFebruary. •  Weber A. (2006), “Concluding Remarks”, Conference of the ECB-CFS Research Network on “Financial system modernisation and economic growth in Europe”, September 29. •  Weber A. (2007), “Hedge funds: a central bank perspective”, Financial Stability Review, Special issue on hedge funds, Banque de France,10, pp 101-168, April. 6  BIS Review 42/2007