lucas papademos : monetary policy in a changing world – commitment, strategy and credibility speech by mr lucas papademos, vice president of the european central bank, at the fourth conference of the international research forum on monetary policy, washington dc, 1 december 2006. * i. * * introduction it is a great pleasure for me to participate in this conference of the international research forum on monetary policy. this is the fourth conference of its kind, and testifies to the increasing significance of this forum, which brings together academics and policymakers from both sides of the atlantic. this year ’ s programme confirms the previously established trend by including papers that address a broad range of issues and which are highly topical and relevant for the practice of monetary policy. i would like to congratulate the organisers for their judgement and hard work that has resulted in putting together an exciting programme for this fourth conference. i find it intriguing that in many cultures the number 4 symbolises the qualities of practicality, application and tenacity, and that it suggests organisation and hard work. i have to say as far as this conference is concerned, the numerologists have hit it right on the spot! since the forum provides an occasion for a transatlantic exchange of views, i would like to address some monetary policy issues as viewed from the european perspective of the still relatively young – though mature – european central bank. when europe took the historic step of introducing a single currency, it was a quantum leap into uncharted policy territory. understandably, some had expressed doubts about the prospects for success. and everybody fully recognised the great uncertainty and potential difficulties that could be encountered. eight years on, however, i think we can safely say that the evidence confirms that the ecb ’ s monetary policy has been a great success in terms of keeping inflation under control and anchoring inflation expectations at a level in line with our quantitative definition of price stability. i believe the effectiveness of our policy can be attributed to three key features that characterise it : commitment, strategy and credibility. but let me add that we are fully aware that we cannot be complacent. a central bank ’ s job is “ never done ”, especially in a rapidly changing world. the ongoing changes in the external environment within which policy is conducted and in the structure of the economy pose new challenges to us policy - makers. in my presentation, i would like to address three challenges for monetary policy. they have in common that they derive from ongoing changes in the

factors have also played a role during some periods. on the other hand, the integration of an enormous reserve of low - cost, skilled labour in the international economy and the increasing production of manufactured goods in emerging market economies have put downward pressure on import prices of manufactured goods as well as on wage demands in industrial economies. as a consequence, the prices of a wide range of manufactured goods have been declining since 2000. this is reflected in the unit value of imports of manufactured products in the euro area which in mid - 2006 was virtually at the same level as in the year 2000. [ see chart 5 ] the counteracting effects of these global price pressures on euro area inflation can be observed more clearly if we take a look at the development of the overall harmonised index of consumer prices ( hicp ) and selected components ( energy and non - energy industrial goods ). [ see chart 6 ] the prices paid by consumers for energy products, which account for approximately 9 % of euro area private consumption, have surged at an average rate of 5. 4 % per annum following the series of sharp oil price increases since 1999. however, the prices of other consumer goods, such as non - energy industrial goods, which account for over 30 % of total private consumption, have increased at a more moderate rate of 0. 7 % per annum on average since 1999. in an environment of significant changes in relative prices, some price increases, for example those of energy goods, may be more visible to consumers than the relatively stable prices of many other consumer goods, and may as a result affect inflation expectations. consequently, it is particularly crucial for monetary policy to anchor inflation expectations to price stability, in order to minimise the likelihood of second - round effects of energy price increases. the impact of globalisation on hicp inflation excluding energy products also reflects its indirect effects on the cost of labour as well as the increased competition it has entailed. euro area labour cost developments have remained moderate in recent years despite the strong increase in energy prices. [ see chart 7 ] there are two major reasons for this welcome development. first, the successful anchoring of inflation expectations has helped contain possible second - round effects on wages from energy price increases. second, globalisation and the increased openness of the euro area economy have influenced labour demand as a result of increased competition and outsourcing and through higher real wage elasticity of labour demand due to a reduction in the bargaining power of workers. it is interesting to note that all labour