interact with expected future variables is a challenge that has been featuring prominently in both academic discussion and monetary policy practice in recent years. accordingly, the book by michael woodford “ interest and prices ”, which is cited frequently nowadays, characterizes the practice of central banking mainly as the management of expectations. this is an aspect of which g. l. s. shackle was already well aware, as we shall see later. having said that monetary policy does have an influence on a variety of interest rates it is not clear a priori whether certain levels of these rates are ‘ adequate ’ in the sense that they represent prudent monetary policy. this brings me to my second point, the information content of interest rates. inferring the current monetary policy stance from prevailing interest rates requires some sort of benchmark. ideally, this would be a reference level – depending on current economic conditions – with which some particular interest rate could be compared, the difference between the two then measuring how loose or tight monetary policy is. for such a benchmark to be useful for the monetary policy decision - making process, it should satisfy certain criteria, including the following three. • first, that benchmark rate should be based on sound theoretical foundations. this would allow a meaningful interpretation of its behaviour and the driving forces behind it. • second, the difference between some particular interest rate and this benchmark rate should ideally be a summary variable reflecting the overall pressure on inflation. if this is not possible, it should, at least, contain some predictive power for future inflation. • third, the benchmark should be readily computable from observable economic data. ideally, this criterion includes the requirement that these data should be available with sufficient precision at the time they are needed. actually, there is an economic variable which is often claimed to provide such a benchmark role : the natural real rate of interest on which i will focus in this talk. i will start with wicksell ’ s notion of the natural rate, followed by a presentation of its definition and role in today ’ s monetary macroeconomics. after that, i will focus on approaches to measuring the natural real rate of interest ( nri ) and its usefulness for the practice of monetary policy. at the end of my remarks, i will try to judge whether the natural rate is able to satisfy all or some of the criteria i have listed. wicksell ’ s concept of the natural rate of interest the concept of a natural rate of interest

. the situation in the euro area is improving and the end of the crisis is coming closer. however, there is no time for complacency. risks remain, among them reform fatigue and the side - effects of low interest rates. thus, we must continue our efforts to put the euro area back on a sound footing. recently, ecb president mario draghi said that 2012 and 2013 were years of stabilisation for the euro area and that 2014 and 2015 may be years of recovery. if we continue down the path of reform, his expectation will prove correct. but as i said at the beginning, the world has become closely interconnected and so, too, have risks and problems. the prolonged period of low interest rates is as much a global problem as it is a european one. and one thing is certain : interest rates will rise again at some point. however, managing this turnaround will prove a formidable challenge. the recent turbulence in emerging markets made this very clear. but in the end, it was domestic problems and a lack of progress in reforms that made some emerging markets vulnerable. to restore investors ’ confidence, they should address bis central bankers ’ speeches domestic vulnerabilities. this might also help to bring down the exchange rate of the euro, as part of its increase was due to capital being reallocated from emerging markets to the euro area. although the turbulence in emerging markets does not have the potential to derail the global recovery it shows how sensitive markets are at the moment. there is still considerable scope for negative confidence shocks. returning to economic prosperity and financial stability requires policy - makers with a stability - oriented mind set – something i do not have to emphasise here at the “ bundesbank of the united states ”. it also calls for mutual understanding and trustful cooperation – qualities that are promoted by institutions such as the american council on germany. i am confident that we will eventually be able to leave the times of downs, busts and turmoil behind us. and that we will finally bring an end to this seemingly endless crisis. thank you very much. bis central bankers ’ speeches