We could in fact attach more importance to the current as opposed to the forecast future rate of inflation but that would probably call for rather large repo rate adjustments in order to keep inflation stable around the target. Such an approach would result in sharp fluctuations in real economic activity, which would naturally not be desirable. Are there any developments which suggest that the time lag for effects of interest rate adjustments may be becoming shorter? More and more home owners are switching from fixed to variable mortgage rates, which may indeed tend to speed up the impact of monetary measures. But there are other factors which may be working in the opposite direction, towards a longer time lag. One example is the costs involved in altering prices. One of the benefits of low and stable inflation is precisely that it facilitates contracts with a longer duration. Insofar as the establishment of a low-inflation regime has led to price movements being more restrained for this reason, it follows that it will take longer for monetary policy measures to impinge on prices. For monetary policy’s time horizon, there are therefore arguments in both directions. The problem of faulty forecasts is limited, however, in that monetary policy is implemented continuously. Moreover, current information about economic tendencies can be accorded more weight than events that lie further ahead and the forecasts can be revised as time passes.
not defining a binding convergence path to the target, rather than a price for being too rigid. On the other hand, I also agree with many of the critiques and proposed adjustments to the Pact. Defining a convergence path, looking at structural rather than headline budgets, taking into account public debt levels and sustainability of public finance, etc., are certainly steps towards achieving the “constrained discretion” in fiscal policy I am talking about. The adverse period should thus be taken as an opportunity to modify the rule in a favourable way, rather than as a reason to scrap it completely. I believe that pursuing this opportunity will secure a future for the S&G Pact. I am convinced that some rule of this kind will always have to be in place in the eurozone, and not only because of its multinational nature, but also due to the general advantages of rules. Let me also mention briefly the importance of the S&G Pact for the Czech Republic and other EU accession countries. The Czech Republic, like many other CECs, is facing the problem of rising budget deficits. This is partly a reflection of the previous transition costs, but these are gradually fading away. The root of the problem is structural, similar to the challenges faced by advanced EU countries as well - population ageing, an overgenerous social system, etc. At present, most countries are preparing consolidation programmes aimed at reversing the negative trends.