What in practice central bankers everywhere have to do is to try to keep aggregate demand growing consistently over time broadly in line with the underlying, sustainable, rate of growth of supply. And consistently low inflation is essentially the measure of our success in achieving that. Yes, we are all  BIS Review 76/2001  1  aiming for effective price stability, certainly. But that is not simply a doctrinaire end in itself - as is sometimes suggested, though not often here in Germany. It is a reflection, if you like, of our broader aim of achieving macro-economic stability in the much wider sense of a sustainable balance between aggregate demand and underlying supply. Insofar as we succeed in that aim we can hope thereby to moderate rather than aggravate cyclical fluctuations in the economy, and to remove much of the nominal uncertainty and related short-termism from economic decision-making. To that extent we can help indirectly to improve the supply-side performance of our economies. This is essentially the thought that underlies the universal central banker's mantra that "Price stability is a necessary condition for sustainable growth", not to mention sustainable high levels of employment and rising living standards, which are, of course, the really good things of macro-economic life. Now it is relatively easy to explain in these terms what we are trying to do. Actually doing it is a good deal harder!
And in terms of confidence effects, it would be a mistake to underestimate the resilience of the American people in the face of adversity. Either way I can assure you that the monetary authorities around the world are actively co-operating to minimise the immediate damage, and that they will certainly be monitoring - continuously and very closely - the emerging evidence of more lasting effects. They will react to that evidence in the light of the likely impact on their own situation. The US slowdown came at a particularly bad time for Japan. Japan was already suffering from a combination of weak domestic demand - particularly consumer demand - and supply-side constraints reflecting pressures on the banking system, heavily burdened with non-performing loans, as well as an acknowledged need for restructuring parts of the non-financial sector. Japan has pretty well exhausted the scope for macro-economic stimulus. Successive fiscal packages focussed on public works, and a sustained period of attempted monetary expansion, at near-zero interest rates in the face of deflation, have failed to overcome a high rate of precautionary saving by an ageing population facing an uncertain economic future. The policy emphasis of the new Japanese administration appears to have shifted towards firmer action to bring about supply-side reform in the belief that this will help to engender greater business and consumer confidence.