jean - claude trichet : a stability - oriented monetary policy as a necessary condition for long term growth speech by mr jean - claude trichet, president of the european central bank, at the unice competitiveness day, brussels, 9 december 2004. * * * ladies and gentlemen, it is a pleasure for me today to address such a distinguished audience, which best represents the european entrepreneurial capacity and dynamism. today i would like to discuss first the general role of policy institutions in a developed market economy. i shall then dwell more specifically on how the conduct of monetary and fiscal policy in the euro area contributes to foster high and sustainable output growth and job creation. finally, i shall stress the importance of structural reforms in labour and product markets in ensuring that our economy is endowed with the degree of flexibility that is needed for firms and workers to be able to withstand successfully the challenges that the contemporaneous, highly interrelated world economy poses to us. the determinants of sustainable long term growth the determination of the factors that increase the individuals ’ standard of living is the main issue that scholars have analysed since economics was born as a modern science more than 250 years ago. the evolution of the economic theory has greatly furthered and deepened our understanding of this issue. nevertheless, one core conclusion remains today as important as it was in the late eighteenth century : the amount of goods and services produced in any given economy grows at its highest possible rate when the rules of market economies are applied. we have learned that this prescription cannot possibly be translated into a pure laissez - faire doctrine, because when the production and the exchange of goods and services is carried out without a proper legal and institutional framework the potential of the economy would not be fully exploited. for this reason, societies need to equip themselves with the right framework, which enhances the collective welfare by clearly defining and ensuring property rights and ensuring the efficient supply of public goods. this means in particular that economic policy must ensure that individuals have the necessary incentive to earn their income by working and producing goods and services which other individuals need. it also means that enterprises must take their decisions on the basis of market signals without relying on subsidies or being protected from competition. this will foster the accumulation of human and physical capital and a high level of employment, which are the determinants of long term growth. to fulfil this objective, economic policy must create and maintain a “ stable ” macroeconomic environment, ensure an appropriate

zealand is consistent with this conditional coordination approach. in the monetary policy targets agreement we have financial stability as a secondary objective. this means that the monetary authorities need to think hard if an ocr decision might have adverse effects for financial stability. similarly, in the macro - prudential mou it is required that macro - prudential initiatives have regard to their potential impact on monetary policy. there remain many aspects of policy co - ordinations where we need to deepen our understanding. these include : • the quantitative effects of macro - prudential policy on macro - economic outcomes and their implications for monetary policy. • the scale and timing of spill - over effects between the ocr and our four macroprudential tools. • how best to coordinate ocr and macro - prudential policy decisions at different points of the economic and financial cycles, particularly when the two cycles are out of sync and the policies are not complementary. this is an active area of the academic literature and a priority area for our own research. i look forward to the insights that this work will give us for our future monetary and macroprudential policy decisions. references beau, d, l clerc and b mojon ( 2012 ) “ macro - prudential policy and the conduct of monetary policy ”, banque de france working paper, 390. borio, c and p lowe ( 2003 ), “ borio, c. and p. lowe ( 2002 ), “ asset prices, financial and monetary stability : exploring the nexus ”, bis working paper, 114. borio, c and h zhu ( 2008 ) “ capital regulation, risk - taking and monetary policy : a missing link in the transmission mechanism? ” bis working paper, 268. drehmann, m and juselius m ( 2012 ), “ do debt service costs affect macro - economic and financial stability? ”, bis quarterly review, september 2012. kohn ( 2013 ), “ the interactions of macro - prudential and monetary policies : a view from the bank of england ’ s financial policy committee, speech given to the oxford institute for economic policy, http : / / www. bankofengland. co. uk / publications / documents / speeches / 2013 / speech692. pdf. reserve bank of new zealand ( 2013 ), “ regulatory impact assessment : restrictions on highlvr residential mortgage lending ”, http : / / rbnz. govt. nz / financial _ stability / macro - pr