The latter, moreover, would be of direct benefit in terms of price competitiveness, as would be the reduction in currency conversion costs and the increased price transparency. Our assessment also shows that Malta is well suited to participate in the euro area. Its economic structure bears a fair degree of similarity with the euro area and both trade and financial linkages are substantial. Furthermore, the lira is already closely linked with the euro so that joining the euro area does not entail a radical change in the parameters applicable to macroeconomic policy setting in Malta. At the same time, most of the formal requirements for entry, with the exception of the criteria on public finances, have been, or stand a good chance of being met on a sustainable basis. As far as public finances are concerned, moreover, the fiscal consolidation process is on schedule, as the EU Council has acknowledged, with the target deficit/GDP ratio for 2004 achieved. A positive track record of exchange rate stability has meanwhile cultivated expectations abroad that Malta will not remain outside the euro area more than is necessary. A delay would thus send the wrong signals to international investors and could well reverse the upgrade in Malta's credit rating as this was partly a response to expectations that Malta would proceed with economic reform at a steady pace to adopt the euro as soon as conditions allowed.
It was once widely held that monetary policy could achieve somewhat lower rates of unemployment by allowing somewhat higher rates of inflation, and that it could do this without risking a  BIS Review 54/2006  1  substantial acceleration of inflation. This view proved to be mistaken because it did not correctly account for the role inflation expectations played in inflation dynamics. Economic concepts that are critical to our understanding of the economy may be difficult or impossible to capture in practice. One such concept is the neutral or equilibrium interest rate, which is the rate that, if sustained over some period of time, is likely to be consistent with an economy growing at potential with low inflation. Plausible estimates for the prevailing level of this rate have a range of at least 100 basis points, and the center of the estimates tends to move around quite a bit. Another concept that is difficult to estimate precisely is the economy's potential, or sustainable, growth rate. The acceleration in productivity growth in the United States in the late 1990s, for example, led us to revise our estimates of how fast the economy was likely to be able to grow at that time without undermining price stability. We also face considerable ignorance about the precise channels through which policy actions ultimately affect the economy, as well as how long those effects will take to show up and how large they will be when they do show up.