jurgen stark : enhancing the ecb ’ s monetary analysis – what have we learnt? speech by mr jurgen stark, member of the executive board of the european central bank, at the conference “ the ecb and its watchers ” xii, frankfurt am main, 9 july 2010. * * * ladies and gentlemen, the title of this session asks : “ should money and credit play a greater role in central bank strategies? ” money has always played a distinctive role in the ecb ’ s monetary policy strategy. from our perspective, it would be more natural, therefore, to ask : “ how should monetary developments be analysed in practice ” and “ how can monetary analysis reflect the role it has been assigned in our strategy? ”. the distinctive role of money first, let me briefly recall the benefits of assigning a distinctive role to money when formulating monetary policy decisions. there is overwhelming consensus regarding the empirical long - run relationship between money and prices. as such, money provides a reliable nominal anchor for monetary policy. what is more, monetary developments can signal risks to price stability beyond the business cycle. in turn, such signals support the medium - term orientation of monetary policy, guarding against an excessive focus on short - term developments in inflation forecasts, as well as misguided attempts to fine - tune economic developments. this commitment to conducting a monetary analysis provides us with an insurance device. it disciplines decision - making. it ensures that risks to price stability are assessed on the basis of a comprehensive set of information. it compels policy - makers to consider trends in money and credit growth, which may exert an influence on price developments beyond that identified by a purely conjunctural or output - gap view of the world. on the basis of these considerations, over the dozen years since the creation of the ecb, we have continued to employ and develop new tools for monetary analysis. we did this even in the face of vocal criticism from a significant camp of economists. they questioned whether money and financial frictions had a role to play in the inflation targeting frameworks that they had identified as “ best practice ” for central banking. money has been ignored. in the canonical new keynesian macro - model on which the intellectual foundations of inflation targeting rests, money has been considered a redundant element in the monetary transmission mechanism. at best, money is seen as a useless appendix to the model, serving only to confuse and distract any policy - maker misguided enough to consider it. now

acknowledges, is that these recommendations are too rarely followed. it would be preferable if countries took them seriously and felt collectively committed. in the case of spain, my personal view is that much remains to be done to support the young people and help find jobs. they are the future. q : would you be in favour of the binding agreements proposed by angela merkel? a : binding agreements are one way of achieving this. however, in my view, it is better to stay within the community framework. it should be a multilateral discussion and not a bilateral one between the commission and each member state. there should be shared sovereignty as far as structural reforms are concerned, because there is a common interest. q : the stress tests are nearing completion. can we expect many failures and are there likely to be any surprises? a : we are checking the results, which will be available in the second half of october, so i cannot make any comments on them at present. q : will the tests be credible after what happened with portugal ’ s banco espirito santo ( bes )? it collapsed despite the fact that the ecb and the rest of the troika had been supervising lisbon for the past three years. a : in the bes case, it appears that information was being kept from the supervisor, which was the banco de portugal and not the ecb. the ecb, the european commission and the imf were in lisbon to analyse financial stability and macroeconomic outcomes. the ecb had neither the instruments nor the mandate to supervise banks, as this was the role of the national supervisor. i do accept, however, that the bes case has served as a reminder that there are risks beneath the surface in the european banking sector, and i am convinced that bis central bankers ’ speeches the single supervisory mechanism will be able to examine the financial health of the institutions in depth. q : could something similar to the bes case happen in other countries? a : this is always a possibility. risks are inherent in banking activities. the only solution is a robust management framework within each bank and on a european level, coupled with instruments such as the single supervisory mechanism or the single resolution mechanism, which will be available in case of crisis. q : some analysts are comparing the situation in the euro area to that in japan. a : i would imagine that they are referring to the situation in japan in the 1990s, rather than to present - day japan. at that time, japan