This has also been confirmed by studies that have found a strong relationship between monetary growth and inflation at low frequencies. In other words, the relationship between money and prices is stronger between the trend-like developments than between the business cycle fluctuations. One interpretation of the international portfolio capital flows that influence monetary developments is that they introduce greater “noise” in shorter-term monetary dynamics, thereby increasing the importance of seeking the underlying rate of monetary expansion by looking at the lower-frequency, trend-like component of monetary growth. Notwithstanding the complications created by an increasingly complex international financial system, money has been, is and will remain an important indicator of inflation. The monetary policy strategy devised by the ECB, with its medium-to-longer-term orientation and the prominence it assigns to economic and monetary analysis, is well placed to address some of the implications of globalisation for inflation dynamics and price stability. The broad analytical framework on which the ECB’s two-pillar strategy rests is well suited to detecting risks to price stability and to the economy as a whole. There is a need to intensify the analytical efforts to deepen our understanding of several aspects of financial innovations, changes in the international financial system and their implications for the assessment of medium to longer-term risks to price stability. Indeed, as our current agenda of enhancing the monetary analyses demonstrates, the ECB is in the vanguard of developing such tools. References Adalid, R. and C. Detken (2007), “Liquidity Shocks and Asset Price Boom/Bust Cycles”, ECB Working Paper Series, No 732.

Domestic assets may be purchased by foreign investors generating net portfolio inflows, which would raise domestic money growth. It is also true, however, that money and credit growth could trigger international portfolio flows. Specifically, two mechanisms can be identified through which liquidity affects international portfolio flows. First, strong money and credit growth in one country may induce capital outflows to foreign asset markets, thereby exerting upward pressure on prices for financial and real assets abroad. Second: At the same time, ample liquidity conditions in the domestic economy may fuel strong economic growth and be accompanied by higher asset prices, thereby inducing foreign capital inflows. The current magnitude of the stock of global liquidity and global savings is such that the asset prices and money growth of large economic areas, including the euro area, can be affected by them. In the same vein, large net capital inflows, as well as their sudden reversals, may also have important real consequences for large economies as they can systematically influence domestic monetary developments with potential implications for monetary policy. Evidence from the euro area shows that international portfolio flows have played an increasingly important role as a driving force for monetary dynamics. As you are aware, the ECB’s monetary policy strategy attributes a prominent role to the analysis of monetary aggregates and their counterparts in the assessment of risks to price stability over the medium to longer term.