But, as the paper by Fischer, Lenza, Pill and Prof. Reichlin demonstrates, the careful analysis of monetary developments in real time has helped the ECB to shape its assessment of the economic situation and the associated risks to price stability and to better identify the nature of the shocks impacting on the euro area economy. As I already said I can bear testimony that, over the past eight years, monetary analysis has helped the ECB to improve its policy decisions. At the same time, the importance attached to the monetary pillar has also signalled that the ECB’s monetary policy has an appropriate medium-term orientation. I strongly believe that this has contributed to shaping agents’ expectations in a manner which enhanced the credibility of the ECB. In this context, the third issue raised by Jürgen – namely how monetary analysis should be presented to the public – is crucial. Presenting the monetary analysis in a manner that serves to stabilise private sector long-term inflation expectations by clearly signalling the ECB’s alertness with respect to risks to price stability at longer horizons is key. Thus, it is particularly important that markets and the public at large have a good understanding of the systematic and conditional conduct of monetary policy by the central bank, so that expectations about future price developments and the path of policy rates are in line with the central bank’s mandate.
The historical fact that, at the time of the introduction of the euro, market interest rates on instruments denominated in euro all along the yield curve were to be aligned with the lowest – and not with the average – rates prevailing prior to the euro was not foreseen by many observers prior to Stage III. The historically low level of short, medium and long-term market interest rates was unthinkable in some countries, which had experienced much higher inflation in the past. In my view, the incorporation of monetary analysis into our monetary policy strategy served, in the eyes of the global market, as an anchor for expectations that in no small way contributed to our success in building and maintaining credibility. The monetary policy strategy of the ECB announced in October 1998 explicitly recognises the monetary nature of inflation by assigning an important role to money in the formulation of monetary policy decisions aimed at the maintenance of price stability. As Prof. Issing explained to us in detail, there were and still are many good reasons to do so. Milton Friedman’s famous dictum that “inflation always and everywhere is a monetary phenomenon” is one of the central tenets of economic theory.