jean - claude trichet : the role of money – money and monetary policy in the 21st century ( panel discussion ) speech by mr jean - claude trichet, president of the european central bank, at the panel intervention at the fourth ecb central banking conference “ the role of money : money and monetary policy in the twenty - first century ”, frankfurt am main, 10 november 2006. * * * your first question was whether monetary analysis has helped us to anchor inflation expectations in the euro area. as i have stressed on previous occasions, 1 i am convinced that a thorough monitoring of monetary developments is important for the anchoring of inflation expectations. on the empirical side, there is ample evidence that there is a strong long - run link between money growth and inflation. this has recently been re - emphasised in the academic literature. 2 on the theoretical side, professor woodford very eloquently told us yesterday 3 that money does not play an important role in the conduct of monetary policy in standard modern - style macroeconomic models. and i have particularly appreciated his elegant and nuanced exposition of the present intellectual debate. i have noted also that professor christiano has pointed out in his convincing presentation that, when such models are extended in a realistic way, also good theoretical arguments in support of a clear commitment to take monetary developments into account in the conduct of monetary policy emerge. this is because it directly helps to stabilise long - term inflation expectations, and as lucas also pointed out yesterday, because it can help to mitigate the effects of boom - bust cycles in asset markets. 4 in fact, the ability of monetary developments to indicate imbalances in the financial system and the implied potential risks to long - run price stability has recently been stressed in particular by the bis 5 and is confirmed by recent research at the ecb. 6 the money pillar of our monetary policy strategy constitutes a visible commitment to take the long - run link between monetary developments and inflation into account in monetary policy decisions. from my experience i can tell you that this has indeed played an important role in our success in anchoring inflation expectations in the euro area. at the time of the transition to emu, giving money an important role in our strategy ensured continuity with the most credible central banks joining the eurosystem. i am convinced that the monetary pillar was crucial to stabilising inflation expectations in the euro area at the low level prevailing in the countries with the most stable currencies at that time. given the historical

to the long period during which we maintained rates at the level of 2 %, from july 2003 up to december 2005. a period, by the way, during which we had made no pre - commitment to maintain rates at this historically low level during a “ considerable period of time ”. on the contrary, the governing council had made it crystal clear that we could change rates at any time during 2004 and 2005 11 and the markets had pretty well understood that posture. my understanding of our decision - making during this period was that it was sometimes a very close call as regards the balance of risks to price stability stemming from the economic analysis. we experienced two periods, around the turn of 2003 / 2004 and around mid 2005 – before the slight recovery of early 2004 was perceived and when it became clear that this start of recovery had aborted – where the balance of risks to price stability from the economic analysis was starting in our minds to slightly tilt on the downside. on behalf of the governing council i made clear during these two periods, in the questions and answers of the press conferences, that all our options were open, including a decrease of rates. if this option did not materialise, it was in my understanding because the monetary analysis was not only not confirming the downward risks to price stability suggested by the economic analysis but was tilting in the other direction. we maintained rates at the level of 2 % and again, with the benefit of hindsight, that decision seems to me clearly vindicated. my third example refers to the recent sequence of policy rate increases. in december 2005, when we first increased policy rates, many commentators judged our move premature against the background of a seemingly fragile economic recovery. in fact, at that time the signals coming from the economic analysis were not yet so strong. but the continued expansion of money and credit through the course of 2005 gave an intensifying indication of increasing risks to medium - to longer - term price stability which played fully their role in our decision to start increasing policy rates in late 2005. in retrospect, the strength of the economic recovery unfolding in the course of 2006 has also shown that our decision was well timed. without our thorough monetary analysis, we could have been in danger of falling behind the curve. your last question referred to the communication challenges related to monetary analysis. we have consistently communicated the results of our monetary analysis and any uncertainty surrounding it to the public. the conference paper by fischer, lenza, pill and reichlin helps in this respect.