neither is going well. a series of stimulus announcements, mostly focussed on increasing government spending for public works has not yet succeeded in stemming the economic slide. a next step might be a significant tax cut, but with japanese consumers and investors both feeling anxious about the future, there is no guarantee that even a large tax cut would result in much near term spending. japanese banking system restructuring is going slowly, although it does seem to be moving toward resolution. we are fine ones to talk, since we let our much smaller savings and loan crisis fester for a long time before facing up to it. with hindsight, the japanese could have restructured their banks much more easily three or four years ago. the worst time to restructure failing banks is when macroeconomic conditions are reducing the value of their assets even further. drastic action now may make the recession worse in the short run, but it may also be the only hope for restoring confidence and financial health in the future. let ’ s suppose this crisis turns around : the contagion is stopped, asian and other emerging market countries begin to grow again ; japan pulls out of recession and begins to contribute with its recovery to recovery of its neighbors ; north america and europe sustain healthy economies. then the big question is : how to avoid such a costly episode happening again. the real costs are not monetary ; they are disrupted human lives and hopes. millions of people in emerging market countries are suddenly without jobs, food, basic necessities, children are not going to school, young people are not learning skills, and are facing uncertain futures. we won ’ t be able to avoid crises altogether. but in the new era of huge capital flows and instant communication, the amplitude and severity and cross border reach of crises are magnified. can we at least make crises less frequent and mitigate the damage? what we should not try to do is retreat to isolation and self - sufficient economies that don ’ t trade or invest in each other. the simple reason is : we ’ d all be a lot poorer. that solution is like saying : we don ’ t like power failures, so let ’ s all stop using electricity or make sure that everyone has a generator in the backyard, so we don ’ t have to depend on the power company. what we can strive for is more cautious better informed investing and lending, better early warning systems and ways of heading off deepening trouble once it begins. better information would help : ⇒ all countries giving complete information on

##tive role played by the price mechanism, which performs best in an environment of price stability. hence, the monetary policy objective of price stability, which served us well in the old economy, will help foster a new economic environment. it is no coincidence, therefore, that the champion of the new economy, the united states, achieved its greatest advances in an era of low inflation. a third issue, crucial for monetary policymakers, is the question of how to react to the new economy. let me simplify matters by conceptualising the new economy as a shock to productivity. the economic consequences of this shock will be felt in the long run as well as in the adjustment towards the new steady state of the economy. let me start with the long run. the new equilibrium is characterised by structurally higher growth rates of productivity, implying higher profitability of investments. in order to attract the capital needed to finance these investments, and achieve macro - economic equilibrium, a higher interest rate is needed. the central bank must take this upward movement of interest rates into account when formulating monetary policy. before this new equilibrium is achieved, the economy goes through a complex adjustment process. analytically, this adjustment not only involves an outward shift of the aggregate supply curve, which by itself implies lower inflation and higher growth. it could also elicit a stimulus to aggregate demand, for example due to wealth effects. the latter would imply higher inflation and higher growth. so, it depends on the circumstances and on the stage of transition from the old steady state to the new one, how monetary policy should react. it is important to note that the monetary strategy of the eurosystem was devised in order to conduct monetary policy in a particularly uncertain economic environment. the monetary strategy is well - suited, therefore, to cope with uncertainties, including the uncertainty surrounding the effects of the new economy. as such, the definition of price stability does not need to be altered and the two - pillar structure will continue to serve us well. there could, however, be a need to re - assess the information content of individual variables within each pillar. let me try to illustrate this. advances in and the spread of ict can lead to new forms of money, i. e. electronic means of payment. anticipating this, electronic money balances held by euro area residents have already been included in the definition of euro area monetary aggregates. however, the new economy could change the information content of the monetary aggregates. for example, electronic money could increase