index, “ price pressures ” – defined as the difference between the year - on - year harmonised inflation rate observed in each quarter and the upper ceiling of our price stability range of 2 % – were absent or even negative in the years preceding the lehman debacle. 1 had the ecb relied on inflation as a summary statistic of the state of the economy, the conclusion would have been that the economy had reached an ideal state of balanced, non - inflationary growth – the “ great moderation ”. our monetary pillar was sending a quite different signal. the growth rate of the broad monetary aggregate m3 doubled during the recovery that followed the bursting of the dotcom bubble. at the same time, premia paid by borrowers on various categories of debt contracts had plunged to levels unseen in the recent history of finance. credit growth closely followed the rampant growth rate of m3. these indicators – which are an integral part of our monetary analysis – were sounding the alarm in an otherwise complacent policy environment. the resulting cacophony of indicators gave some headaches to the ecb staff who had to interpret them and also to policy - makers, who were forced to challenge the rosy outlook offered by the mainstream narratives of the time. now, in retrospect, we know that the undertone played by the monetary analysis, which appeared so much out of tune at the time, was in fact the counterpoint, the hidden score of financial instability. lehman ’ s demise and what followed revealed the score of the hidden voice, and its drama. the moral i draw from this episode is the following. the price stability objective needs to be reinforced, in the day - to - day conduct of policy, by an intense strategic focus on monetary and financial indicators. when financial markets create excessive leverage – too much credit – and engage in imprudent maturity transformation – too much bank money – reacting to financial booms under the monetary pillar will not only ensure price stability but also counteract the build - up of risk. vice versa, very subdued credit dynamics, such as those we are currently observing, provide crucial signals of how long the accommodative monetary stance is warranted. this probably requires a better understanding of the ebb and flow of liquidity and the drivers of endogenous money creation inside the financial system. but the possibility of activating this fail - safe policy mechanism largely depends on how the price stability objective is defined. the fact that inflation can move within a certain

set of sources of risks to price stability – such as developments in import prices ( for example energy prices ), changes in administered prices and indirect taxes, wage dynamics, and so forth – have an impact on the prices of goods and services in the shorter term, say within a year or two. a comprehensive assessment of these risks is made by the ecb in the context of its “ economic analysis ” – one pillar of its monetary policy strategy. other sources of risks – notably monetary developments – have implications for the outlook for price stability at medium to longer horizons. extracting the policy - relevant information about longer - term trends in inflation contained in monetary data is the core task of the ecb ’ s “ monetary analysis ” – the other pillar of its strategy. it is not that one form of analysis is better or more important than the other. it is simply that they are different. the two - pillar structure acknowledges the difference in perspective ; by keeping the two perspectives as separate pillars, the clarity and coherence of each is enhanced. at the same time, the two perspectives are complementary : the value of each is enhanced by comparing it, or as we say “ cross - checking ” it, with the other. • second, assigning prominence to the monetary analysis ensures that the information contained in monetary and credit aggregates is always given appropriate weight in both internal and external discussions of monetary policy. the economic analysis has a focus on how various shocks drive business cycle developments. these are of course very important in setting the course of monetary policy. but, by their nature, the impact of these shocks on business cycle dynamics largely dissipates over time. thus, focusing exclusively on the economic analysis runs the risk that key indicators of longer - term trends in price developments are neglected. ensuring that price stability is preserved over the medium to longer term is the fundamental task of monetary policy ; indeed, this is the primary objective defined in the ecb ’ s mandate. given the robust link between trends in monetary growth and trends in inflation, a prominent role for money in the strategy provides insurance that the ecb does not “ take its eye off the ball ” and get distracted from its most important task. it is useful to place our experience in a wider context. over the past few years, we have observed that money and credit are gradually returning as subjects of academic research and, here and there, also to the practice of central banking. at the ecb conference held in march, which was attended by