the many and sizeable economic shocks that have hit the euro area since the introduction of the euro. when looking at the euro area as a whole, a regime shift towards greater monetary stability took place during the second half of the 1990s. this was associated with the emu project enshrined in the maastricht treaty, and in particular with the convergence process and the introduction of the euro. since the ecb became responsible for monetary policy in the euro area in 1999, hicp inflation has averaged 2 %. this is very near to the “ below and close to 2 % ” at which the ecb aims over the medium term. let me remind you that during the 1980s and 1990s, the average inflation rate was 4 %. inflation expectations have also been remarkably stable in recent years. average long - term consensus inflation expectations have fallen from 2. 8 % in the 1990s ( 1990 to 1998 ) to 1. 8 % over the past six years. this is fully in line with our definition of price stability. the very low levels of short - term and long - term interest rates which we are currently observing are providing substantial support to favourable financial conditions. these low levels would be unthinkable without the successful stabilisation of inflation expectations. … have also contributed to low macroeconomic volatility a further remarkable feature of the change in economic performance is the strong decline in nominal macroeconomic volatility. with the convergence process during the 1990s, inflation volatility fell strongly. the volatility of quarterly hicp inflation in the euro area ( measured as the standard deviation over the previous six years ) fell from around 0. 6 percentage point during the late 1980s to less than 0. 3 percentage point in the mid - 1990s. since then, inflation volatility has stabilised at this very low level, in spite of major inflationary shocks. and the average volatility of long - term consensus inflation expectations has also declined substantially, by four - fifths, from almost 0. 5 percentage point in the 1990s to around 0. 1 percentage point in recent years. lower volatility of actual and expected inflation reduces consumer and investor uncertainty and thereby enhances welfare. stable inflation expectations and a high degree of confidence on the part of financial market participants in monetary policy should, over time, also lead to a reduction in the volatility of longer - term interest rates, and thus also to lower risk premia. indeed, over the past six years, there has

from 8 percent to 4 percent, no adequate restrictions are imposed. in this respect the differentiated reserve requirement ratio to be applied from april 25 will help regulatory implementation. in sum, only when the micro foundation with well - defined business objectives and control mechanisms is in place, could monetary policy transmission work. ii. in a transition economy, policy - makers tend to rely on quantity measures and avoid price instruments. in fact, the experience of price reform shows that price mechanism is often more effective than expected. monetary policy transmission mechanism to a great extent determines the choice of instruments. in the monetary policy conduct, there have always been disputes on the pros and cons of price and quantity instruments. currently, price instruments such as interest rate and exchange rate coexist with quantity instruments such as liquidity absorption and foreign exchange control. for an extended period of time in china, quantity measures were preferred while price instruments were seldom used. this was the expediency given the constraints of the transmission mechanism as well as the result of the policy legacy from the demand economy mentality. a centrally planned economy emphasized quantity control. when demand and supply are out of balance, quantity indicators are often imposed to increase supply or contain demand. the same mentality, when applied to the financial sector, tends to tighten liquidity when there is inflationary pressure, and in the sequence of policy choice, price instruments are only considered after quantity control. some believe that in financial sector transition, the borrowers, e. g. the soes, and lenders, e. g. state - owned banks are not sensitive to price movements. however, empirical studies did not support this assumption. china has been gradually moving to focus on the use of price instruments. an example would be that when inflationary pressure emerged at the beginning of this year, the central bank adjusted its lending rate and rediscount rate. as a matter of fact, the effects of and responsiveness to price instruments usually turn out far better than expected. examples are abundant. it is foreseeable that with market liberalization of the economy, price mechanism will play a more prominent role and there will be more willingness to use price instruments. it should be noted that when the actual price is close to equilibrium, price is elastic and price instruments are more effective. whereas if the actual price is too far from equilibrium, price may not longer be elastic and price instruments cease to be effective. this can be proved by empirical analysis. iii. the study of