fifty years there has been a preference for rules to constrain policy makers, so as to avoid previous mistakes. australia ’ s experience, which is in line with the experience of english - speaking countries, has been different. medium - term orientation and monetary analysis whether characterised as “ constrained discretion ” or “ rule - based, but not rule bound ”, modern monetary policy frameworks accord central banks a certain “ degree of freedom ” in their decision making. to what ends should this freedom be put? to be clear, it is crucial that price stability is maintained over the medium term. but it is neither feasible nor desirable for inflation to be targeted on a short term basis. within the academic literature, this is recognised in the so - called “ flexible inflation targeting ” framework. 2 this framework explicitly foresees the use of monetary policy to smooth developments in economic activity over the business cycle, while anchoring longer - term inflation expectations at levels consistent with price stability. from the outset, such considerations were also recognised in the ecb ’ s strategy. we have always acknowledged the need to avoid excess volatility in output and nominal interest rates, which would have resulted from excessive “ fine tuning ”. 3 our approach is characterised by a medium - term orientation, which recognises that – given lags in monetary policy transmission and the inevitable short - term shocks to price developments – we should not attempt to j. taylor and j. c. williams ( 2009 ), “ a black swan in the money market, ” american economic journal : macroeconomics 1 ( 1 ), pp. 58 - 83. l. e. o. svennson ( 1998 ), “ inflation targeting in an open economy : strict or flexible inflation targeting? ”, victoria economic commentaries 15 ( 1 ). ecb ( 1999 ), “ the stability - oriented monetary policy strategy of the eurosystem ”, monthly bulletin ( january ). “ micro - manage ” price developments. rather we evaluate risks to price stability at the medium - to - longer term horizon. the literature has focused on the use of monetary policy to smooth output in the relatively shorter run. but the flexibility accorded by a “ rules - based, but not rule - bound ” approach can be oriented in other directions. for example, it can be used to contain financial imbalances, by applying the same approach as we adopt when facing other sources of inflationary pressure. if the slow accumulation of financial imbalances poses a threat to macroeconomic

state that the euro will be the currency of the european monetary union as from the 1. 1. 1999. as a consequence, the national currencies, in particular notes and coins, will continue to circulate during a transitional period, as subdivisions of the euro. two other key elements are that the changeover will ensure the continuity of existing contracts denominated either in national currencies or in ecu and that the ecu will become the euro at a rate of 1 to 1. besides legal security, emu will reinforce monetary stability in europe. the maastricht treaty provides for a monetary framework very similar to that prevailing in germany and in france. the primary objective of the european system of central banks ( made up of the european central bank and national central banks ) will be price stability. the ecb council of governors ( only those of countries participating in monetary union ) will decide independently the level of official interest rates. representatives of the european council may attend the ecb council meetings, but they will not participate in the voting procedure. monetary union will be characterized by a single monetary policy and national fiscal policies. in this context, the issue of fiscal discipline and coordination is crucial. sound fiscal policies will help the escb to maintain price stability. coordinated fiscal policies will contribute to a balanced policy mix in europe. fiscal discipline will prevent free - rider strategies by countries running large deficits and raising funds at low interest rates, thanks to the credibility and stability of other countries. this question of european fiscal discipline is important in the context of the main criticisms which are presently enumerated, particularly from outside europe, in the analysis of the concept of emu. without being exhaustive in this listing, i personally see four major criticisms : first, it is sometimes argued that emu will lead to greater rigidity, in diverting attention from the necessary structural reforms and inducing an inward - looking posture over europe at the very moment when global competition is of the essence. secondly, the difficulty of delivering an appropriate “ policy - mix ”, the monetary policy being by definition concentrated in the hands of the ecb and the escb when, at the same time, the absence of a federal government and therefore of a federal budget leaves the fiscal policy of the union in the hands of 15 different governments. thirdly, the difficulty of absorbing “ shocks ” in a particular member economy, whether this shock is of a domestic or an external nature. this difficulty stems in particular from the absence