profitability in the internationally exposed sector. it is important to be aware of the relationships between employment, output and inflation. if there is a shortage of labour and other economic resources, a tight monetary policy stance will reduce inflation by affecting aggregate demand. conversely, when unemployment is high, low interest rates stimulate demand, which will contribute to stable wages and prices. a monetary policy stance that is aimed at stabilising inflation will thus also contribute to stabilising aggregate output and employment. in the long term, monetary policy determines the average level of inflation. output is determined by the supply of labour, capital and technology and by productivity growth. attempts to increase output beyond the total capacity of the economy will lead to inflation in the long run. what monetary policy can do is to maintain stability without unnecessary fluctuations in output and employment. overall employment is also influenced by wage formation. if wages increase at an unsustainable pace, employment will decline and unemployment will gradually increase. monetary policy cannot prevent an increase in unemployment that is due to a wage - driven cost shock. when there is confidence that monetary policy will contribute to low and stable inflation over time, it can contribute in the short term - under certain conditions - to smoothing fluctuations in output and demand. in the short term, there is a trade - off between the objectives of inflation stability on the one hand, and output and employment stability on the other. an aggressive monetary policy will rapidly bring inflation to the target. this will cause wide fluctuations in the real economy. the interest rate can also be changed more gradually, which will have less impact on the real economy but cause more pronounced fluctuations in inflation. by influencing inflation over time, we can ensure that an overly aggressive monetary policy does not in itself cause unnecessary disturbances to the economy. the impact of monetary policy occurs with considerable and variable lags. our analyses indicate that a substantial share of the effects of an interest rate change will occur within two years. two years is thus a reasonable time horizon for achieving the inflation target. it is nevertheless conceivable that in a situation where a very high rate of inflation is accompanied by sluggish economic growth, norges bank may decide to apply a somewhat longer time horizon than two years to reach the inflation target of 2½ per cent. the choice of monetary policy time horizon reflects the fact that there are real economic costs associated with bringing inflation rapidly back to the target. this horizon is thus an indirect expression of the trade - off between the objectives of, on

governing council had cut the main refinancing rate to 1. 0 %. the main refinancing rate was lowered to 0. 25 % in november 2013, while the rate on the ecb ’ s overnight deposit facility was reduced to zero. the governing council now faced a dilemma : although the economic situation demanded further monetary stimulus, official interest rates could not fall much further. nominal interest rates cannot fall far below zero. otherwise, households and firms would simply withdraw money from the banking system and hold cash. this ‘ zero lower bound ’ is another constraint on monetary policy and one that had not been envisaged when the monetary policy framework for the euro area was designed. in response, the ecb embarked upon a range of non - standard measures. first, following the example of several other central banks, the governing council pushed the overnight deposit rate into negative territory and the rate on the main refinancing operations down to zero. second, the ecb launched, and then extended, an asset purchase programme, pushing down long - term sovereign bond yields and lowering borrowing costs for the private sector as well. third, the ecb began offering banks a series of targeted long - term refinancing operations on favourable terms, aimed at prompting them to lend to the private sector. these measures were aimed at stimulating economic activity, staving off the threat of deflation and pushing inflation back up towards its target of below, but close to, 2 %. these unconventional policy measures have been instrumental to provide additional accommodation to the economy and prevent a self - sustaining fall in inflation. however, although economic activity has firmed, inflation still has not converged with the ecb ’ s objective. underlying inflation pressures remain subdued. the governing council continues to hold that such an accommodative monetary policy stance must remain in place until a sustained adjustment in the path of inflation has been achieved. until now, we do not have sufficient evidence that we have reached this critical point. this brings me to my second proposition. because of the existence of the zero lower bound, it is far easier for monetary policy to fight inflation by raising interest rates than to combat deflation by lowering them. although central banks world - wide have used a range of non - standard measures to stimulate economic activity and push inflation up to the target, in practice, this has proven to be extremely difficult. moreover, as i pointed out earlier, the institutional set - up of the euro area rules out the easiest