The latter would be particularly beneficial for the euro area where the risks to financial stability can be transmitted even faster than elsewhere and a lack of trust in part of the financial system can be felt across the entire currency area.
Since monetary policy operates with long and variable lags, policy formulation must be forward-looking and anticipate the forces that might be acting on the economy one and two years out.3 The present situation is further complicated by three macroeconomic puzzles – the recent behaviour of three key variables and their implications for future economic performance.