a determination of the demand for money. we might be a long way from building such a model. but we can have some intuitions. we could start from the fact that money is both substitutable and complementary to financial assets. because it is substitutable, money demand depends on changes in relative returns - i. e. the actual and expected moves in interest rates. but money is also a complement to financial assets, and as such reacts to permanent changes in the supply, availability and characteristics of those assets. our economies are becoming more and more " financial " in the sense that the ratio of financial wealth to gdp is constantly increasing. since economic agents - especially financial intermediaries and corporates - need to keep part of their total financial assets in liquid holdings, there may be a structural increase in the demand for money ( everything equal ). the euro and the integration of european capital markets may have accelerated this evolution. this could help explain the apparent break in the trend of the income velocity of money that took place in the euro area in 2000 / 2001. in effect, since 2001, income velocity has been declining by 3. 5 % a year, much faster than the rate embedded in the reference value. according to one possible interpretation, this trend is a reflection of two consecutive shocks : from 2000 to 2004, a temporary " demand " shock, mainly reflecting portfolio shifts ; and, since 2004, a " supply " shock i. e. an increase in liquid assets triggered by the fall in the opportunity cost of holding money in a context of historically low interest rates. but the fact that this situation has now lasted since 2001 may suggest another explanation : that the apparent break in trend velocity that took place at that time is of a structural nature. on - going econometric research carried out at the banque de france confirms this intuition. the sharp decrease in interest rates, of course has played a role. nevertheless, econometrics seems to show that this only accounts for a very small part in the break in the trend visible since 2001. so we might be facing a permanent increase in the demand for money. consistent with this hypothesis is the fact that money holdings by corporates and financial institutions have grown much faster, in recent years, than those of households. money and credit growth could then be related to a common cause : financial development and the increasing weight of financial assets in our economies. a lot of work, however, remains to be done to fully understand the changes

unpredictability, a point to which i shall come back later. this has led to the demise of monetary aggregates as targets of monetary policy, and, in some countries, they have been abandoned as indicators as well. but we still think, in the euro area, that friedman is right in the very long run. our research has established that low frequency movements in money growth and inflation are closely correlated, retaining fluctuations with a period of 8 to 10 years. this is because, in our view, money can directly influence output and inflation in particular due to monetary and financial frictions existing in the economy and also some stickiness in the price determination process. those facts underpin the two pillar approach of the eurosystem as you know, the eurosystem ’ s monetary policy strategy is grounded on two pillars : economic analysis, on the one hand, and monetary analysis, on the other. a wide set of short - term indicators ( economic analysis ) are complemented by the longer - term determinants of inflation ( monetary analysis ). this setup is based on a premise and has one important implication. the premise is that even if money has no systematic and immediate influence on prices, it can provide valuable and specific information on future inflation, at time horizons stretching beyond those usually adopted for the construction of central bank inflation projections. because of the long - term relation between money growth and inflation, money has leading - indicator properties on future price developments. one could make the case that this is only an " empirical argument ". but, in central banking, empirical realities do matter much. one could also argue that other strategies - such as targeting the price level or an average level of inflation over the long run - would have the same stabilizing properties as looking at money growth. i do not disagree in theory. but it is not clear to me that those strategies would be easier to implement or have the same anchoring effect on inflation expectations. the implication is the need to cross - check the information on inflationary pressures and risks to price stability ; this cross - checking implies that we bring together and compare different analytical strategies and that we use systematically all the information relevant to decision - making. of course, monetary policy does not react mechanically to monetary developments, but rather responds to the information in monetary aggregates that is relevant for maintaining price stability over the medium term. this is the rationale behind the definition of " a reference value " for monetary aggregates. the monetary pillar supports a risk