is illustrated in chart 2. the chart shows that using strong instruments to achieve an inflation target or exchange rate target in the short term results in more pronounced fluctuations in the real economy. by allowing greater flexibility with regard to the short - term achievement of goals, it is possible to achieve more stable developments in the real economy. but confidence in the nominal anchor must not be undermined. this may lead to a less favourable trade - off, as illustrated in the chart by the broken line. if there is insufficient confidence in monetary policy, economic agents may expect higher price and cost inflation to persist. this will be taken into account when setting wages and prices. the result will be a wage and price spiral. experience shows that this in turn leads to slower growth and lower employment. a lack of confidence therefore entails a risk of higher unemployment. in consequence, monetary policy must also focus on movements in nominal variables when the economy is subjected to supply - side shocks in order to prevent the economy from entering a vicious circle. the building of confidence in nominal developments must be given sufficient priority. if there is confidence in monetary policy, economic agents will expect the rise in price and cost inflation to be of short duration. higher prices will then not feed through to prices for other goods and to wages to the same extent, and there will be less risk of a recession. confidence in monetary policy therefore results in a better trade - off between nominal fluctuations and fluctuations in production and employment. i have been talking about supply - side shocks to the economy. however, there are many types of shock where there is no conflict between stable nominal developments and stable developments in the real economy. for example, a sharp decline in overall demand may give rise to a deflationary recession. in such a situation, an expansionary monetary policy may contribute to both nominal and real economic stability. whether disturbances arise on the supply side or the demand side, it should be possible to use the interest rate to influence economic developments. the interest rate is an instrument, rather than a target variable. a passive monetary policy will lead to both price and exchange rate instability and to greater fluctuations in production and employment. however, an active monetary policy does not imply attempting to fine - tune economic developments. we must be mindful of the uncertainty associated with economic developments and the effects of monetary policy. normally, interest rate changes should be made gradually to allow us to acquire more information, for example about the effects of previous interest rate changes. uncertainty and credibility according to nor

there has, for example, been a rapid growth of the euro - denominated private bond market. the euro did not cause this trend, but it has given it a major impetus. the process of monetary policy - making and its implementation has functioned efficiently. the evolution both of external inflation forecasts and of inflation expectations derived from the analysis of long - term interest rates ( in particular, index - linked bonds ) indicates that the financial markets and economists widely expect medium - term price developments that are in line with the ecb ’ s definition of price stability. obviously, bond yields and many external forecasts incorporate expectations of future policy changes and therefore offer a judgement on prospective monetary policy decisions, as well as on decisions taken in 1999 and 2000. as such, they provide a positive assessment of the overall monetary framework. actual inflation in 1999 stood at 1. 1 %, compatible with price stability. although inflation has increased this year, it is still relatively low, both historically and compared with the united states, for instance. above all, as indicated earlier, monetary union has proven to be a catalyst for major improvements in the structural economic environment. in this respect, there is thus also reason to expect that the euro area could benefit over time from the advances in the new technologies, as the united states has apparently been doing already. europe is thus changing and much has already been achieved. the advances are noteworthy, although they are not always appreciated, not even by europeans themselves. there remains a great deal to be done in order to further upgrade the structural environment. however, this in itself creates opportunities for the future as there is a large potential to be exploited. 3. outlook for euro area economy let me now turn to the conjunctural side of the economic environment. where economic growth is concerned, the euro area economy has impressively overcome the negative mood prevailing in early 1999, recovering to reach a state of affairs not seen for more than a decade. real gdp growth in the euro area has shown a strong performance since mid - 1999, with four consecutive quarters of 0. 9 % growth, quarter - on - quarter, and the forces underlying sound growth in the medium term remain in place. the external environment remains favourable. domestic demand is expected to continue to be strong as well. consumption is benefiting from high consumer confidence and further increases in employment, and investment is being stimulated by higher corporate profitability and increasing rates of capacity utilisation. domestic financing conditions are also good. this positive outlook