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

benoit cœure : monetary policy in the crisis – confronting short - run challenges while anchoring long - run expectations speech by mr benoit cœure, member of the executive board of the european central bank, at the journees de l ’ afse ( association francaise de science economique ) 2013 “ la crise de l ’ union economique et monetaire ( uem ) : enjeux theoriques et perspectives de politique economique ”, university of orleans, orleans, 17 may 2013. * * * i wish to thank federic holm - hadulla and massimo rostagno for their contributions to this speech. i remain solely responsible for the opinions contained herein. ladies and gentlemen, dear colleagues, it is a great pleasure to speak to you today. i would like to use this opportunity to reflect on a fundamental tension lying at the heart of monetary policy : a central bank ’ s success in ensuring macroeconomic stability depends on it having a credible commitment to price stability. and to build and nurture such credibility, it should have a track record of responding in a consistent, transparent and predictable way to shocks hitting the economy. at the same time, financial and macroeconomic disturbances are sometimes of a scale and complexity that they alter the underlying structural relationships between key economic variables. this, in turn, challenges monetary policy - makers to temporarily adapt their established strategies to a new environment without undermining their inflation - fighting credentials. the current crisis provides a salient case study of such a tension : starting with a loss of confidence in the solvency of certain financial institutions, the crisis quickly morphed into a broad - based impairment of private financial intermediation. as a consequence, the link between monetary policy impulses and economic aggregates – which is the structural relationship most relevant for central banks – was severely affected. confronted with this new environment, central banks across the globe have expanded their toolkits to compensate for their reduced influence on economic outcomes. the measures they took have in many cases helped to stabilise the economy. but they have also triggered a lively debate on where to draw the line between crisis - fighting efforts on the one hand – and a general departure from established principles of monetary policy on the other. i would like to consider how central banks can resolve the tension between anchoring longterm expectations and flexibly confronting short - term challenges. i will argue that the key to success lies in a clear -