The ECB currently participates in the meetings of international organisations, such as the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD) and the Bank for International Settlements (BIS), and different fora, such as the G7. Such  BIS Review 50/2001  1  exchanges are important, among other things, to better understand economic developments and to fully analyse the spillover effects in the economy arising from different policies. The ECB is not in a position to fine tune economic activity in the euro area, as it does not have the instruments to do so. Any attempt to do so would prove counterproductive, leading to an inefficient medium-term outcome characterised by higher inflation and lower growth. Two main factors support this view. First, economic developments are surrounded by a great deal of uncertainty. This uncertainty affects the analysis of both the current state of the economy and its future course. And second, monetary policy operates with relatively long lags, having very little effect on the economy in the short run. Past experience has shown that attempts to fine-tune the economy might place in jeopardy the commitment to maintain price stability in the medium term, as is essential for a wellfunctioning economy. Once inflation exists and inflation expectations prevail in the economy, the economic costs of the subsequent necessary stabilisation far exceed whichever temporary benefits might have been previously obtained. Therefore, the ECB needs to remain focused on the maintenance of price stability in the medium term.

By unambiguously assigning the primary objective of price stability to an independent central bank, the Treaty recognises that focusing monetary policy on the maintenance of price stability in the euro area ensures that monetary policy will make the best possible contribution to improving economic prospects. This view is rooted in the fact, supported by decades of practical experience and empirical evidence, that the benefits of price stability for growth are substantial. Without putting forward all the arguments, allow me to highlight, in particular, that the maintenance of price stability helps to allocate resources efficiently both across uses and across time. Inflation causes economic agents to confuse transitory with permanent price changes, and therefore distorts their decision-making process. In evaluating investment opportunities, firms need to have confidence in the signals conveyed by relative price changes, and to discriminate between relative price adjustments and general changes in the overall price level. This process is facilitated in a situation of overall price stability. Price stability therefore improves the transparency of the relative price mechanism and can promote an adequate environment to increasing the growth potential of the euro area economy. Moreover, as experience has shown, stable prices minimise the inflation risk premium, thereby lowering long-term interest rates and helping to stimulate investment and growth. In order to maintain price stability, the ECB has designed a monetary policy strategy wherein risks to price stability are assessed on the basis of two pillars. The first pillar assigns a prominent role to monetary developments.