jean - claude trichet : hearing before the economic and monetary affairs committee of the european parliament speech by mr jean - claude trichet, president of the european central bank, at a hearing before the economic and monetary affairs committee of the european parliament, brussels, 21 march 2007. * * * madame la presidente, mesdames et messieurs les membres de la commission economique et monetaire, c ’ est avec un interet chaque fois renouvele que je parais, tous les trimestres, devant votre commission afin de poursuivre le dialogue de la banque centrale avec le parlement. la banque centrale europeenne est, vous le savez, tres attachee a cet exercice qui contribue a rendre notre action transparente vis - a - vis du citoyen europeen. je commencerai mon intervention par une evaluation de la situation economique et monetaire. anschließend werde ich auf die unterschiede, die bei den geldpolitischen transmissionskanalen in den usa und dem euroraum bestehen, sowie ihre praktischen auswirkungen eingehen. zum abschluss mochte ich die bedeutung von preisstabilitat aus sozialpolitischer perspektive erlautern. economic and monetary issues since my previous appearance before the european parliament in december last year, newly available information has served to confirm our assessment that economic growth in the euro area continues to expand robustly. in addition, the cross - checking of our economic and monetary analyses have underlined the existence of upside risks to price stability over the medium to longer term. accordingly, on 8 march the governing council of the ecb decided to increase key ecb interest rates by 25 basis points. our decision to increase key ecb interest rates in march contributes to ensuring that medium to longer - term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability, which is a prerequisite for monetary policy to make an ongoing contribution towards supporting sustainable economic growth and job creation in the euro area. let me explain the assessment underlying this decision and the outlook for the economy and risks to price stability. starting with the economic analysis, according to eurostat ’ s first estimate, the quarter - on

shock to inflation is faster to dissipate – even if prices and wages are relatively more rigid – if inflation expectations are more firmly anchored. now, while the statistical approach has generally failed to spot significant differences across the two areas, structural analysis comes to two main conclusions. the first is that, in the euro area, prices are distinctly less flexible than in the united states. 1 second, an inflationary shock dissipates quickly in the euro area despite rigidities, and inflation has a tendency to return to its long - run norm reasonably quickly. survey - based measures of inflation expectations, for example, suggest that the ecb ’ s influence on expectations seems to have become much stronger since the establishment of the euro. 2 what are the implications for policy? i will mention two of them, both stemming from the notion that the appropriateness of policy cannot be judged in abstract terms : policy needs to be carefully calibrated to the underlying economic structure. 3 first, in a relatively rigid economy, the adjustment falls primarily on quantities. so, a central bank is generally well - advised to avoid volatile policy paths, which in those conditions can transmit unwelcome volatility to the economy and often necessitate corrective, countervailing action further down the road. second, inflation expectations that look more forward – to the central bank ’ s intentions – than backward – to inflation history – call for more persistence in the policy direction. again, a central bank that moves its policy rate around in response to each twist and turn in the data would under these circumstances have only a limited impact on the economy. when the inflation process is as forward - looking as it is in the euro area, policy shifts that lack persistence have little impact on longer - term interest rates, on expectations and – ultimately – on macroeconomic and pricing decisions. counterfactual policy evaluation is difficult to conduct and necessarily conditional on a long list of technical assumptions. nonetheless, recently conducted counterfactual policy - evaluation exercises suggest that since 2001 – and compared with the flexible economy par excellence, the us – our policy interventions had a greater stabilizing effect on the economy. in tune with the structural conditions the eurosystem has made important contributions to the analysis of price rigidities in the euro area. a summary of a very extensive research project conducted jointly by the ecb and the national central banks is provided in altissimo, f., m ehrmann. and f. smets ( 2006