Why do you think financial markets are required. what are your views on proper regulation of these markets?
Answers
It is a great pleasure and honour for me to join the Oesterreichische Nationalbank for its 2001 Economics Conference on "The Single Financial Market: Two Years into EMU". I would like to take the opportunity today to talk about the role of financial markets for economic growth. I shall first consider whether the design of the financial system matters for economic growth. Secondly, I shall say a few words about where the euro area financial system is headi significant issue for policy-makers, and particularly for central bankers, since smoothly functioning and efficient financial markets are crucial in ensuring a smooth transmission of monetary impulses.
The best contribution that monetary policy can make to the smooth functioning and integration of European financial markets and to economic growth is to maintain a steady medium-term price stability orientation. Such a policy will be beneficial, as it will minimise the adverse effects of inflation and high inflation uncertainty. As we all know, price stability is beneficial in numerous ways. It not only creates a climate for higher economic activity over the medium term, but also reduces the economic and social inequalities caused by the asymmetric distribution of the costs of inflation among the various economic agents. In addition, in an environment of low inflationary expectations, inflation risk premia become relatively less important as a determinant of financial prices. As a result, other factors such as credit risk can play a larger role in the price formation mechanism. Ultimately, this results in a more efficient allocation of financial resources.
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