restraining inflationary pressures. in this regime, a policy tightening comes together with expectations of higher and more obstinate inflation in the future. so, long - term nominal yields will tend to move up in the aftermath of an interest rate hike. a third typology is also conceivable : a situation in which markets perceive a shift from one regime to the other. imagine that market participants were to regard a policy move as a signal dissipating all the ambiguity that might have existed before about the true objectives of monetary policy. imagine that a single move in a particular situation were to show the foundations of a new regime, and show it to be more likely than the past regime to operate according to the rules of a full - credibility monetary standard. in this situation, one would expect to see an interest rate hike being accompanied by a decline in long - term rates. 5 this brings me back to 1997. the evidence that we gather from that episode is very difficult to rationalise and highly controvertible, especially because the financial crises in asia and russia – which took place around the same time – might blur the picture as we look back to those times. overall, the evidence certainly warrants closer and better scrutiny. but my reading of the episode is that it is consistent with a shift to a more credible policy regime. after the announcement of october 1997 and the communication thereafter market rates reacted in a direction that few could have anticipated. not only did the remaining spread between the converging economies and the core countries progressively disappear. thus, the remaining ambiguity about the very nature of the convergence process finally dissipated. but many commentators and market participants – not to mention policymakers – noted that the benchmark yield curve itself was changing shape in a direction that demonstrated an additional clear break in expectations. 6 this is without doubt a remarkable success. yet, it is not one grounded in magic but based on a sequence of sound institutional, economic and monetary decisions. securing and reinforcing credibility to sum up my understanding of why we have so impressively succeeded in mastering a smooth transition to the euro, i will mention six necessary conditions that had to be met and were met. had only one of these conditions not been met, the transition would not have been a success. these conditions are the following : 1. independence : full guarantee for the independence of the ecb was given by the treaty and guaranteed by it ; 2. clarity : clear primary objective of price stability given by the treaty to

jean - claude trichet : monetary policy and private expectations text of the zolotas lecture given by mr jean - claude trichet, president of the european central bank, at the bank of greece, athens, 25 february 2005. * * * ladies and gentlemen, xenophon zolotas, long - serving governor of the bank of greece and prime minister of his country, once said, with supreme synthesis, that “ political magic has always been anti - economic. ” in history, monetary policy has sometimes reverted to magic in an attempt to eschew economic reality. the outcomes of such attempts are well - known and their magic has proven short - lived. a decisive change in direction started, in a large part of the industrial world, 30 years ago as a result of a deeper understanding of the role of expectations in shaping economic behaviour. today, solid and credible institutions have been put in place in many countries and have earned a respectable reputation of good policy management. decades of experience accumulated from institutional evolution and advances in economic thinking have provided us with guidelines for designing credible institutions that are based on sound economic principles. clearly, the open - ended nature of economic progress confronts central banks with new and unprecedented challenges and will no doubt keep central banks occupied in the years to come with the issue of how to maintain expectations of low inflation and preserve credibility. the creation of the euro is an example of such a challenge. these will be my themes today. governor and prime minister zolotas was an early advocate of a monetary regime in which the formation of prices is fully protected from the influence of short - term considerations. so, some thoughts on expectations and their subtle interactions with institutions and policies might be an appropriate tribute to his memory. central banks ’ long quest for macroeconomic stability 30 years ago the formation of expectations moved from a peripheral area of theoretical enquiry into the very core of macroeconomic thinking. today, the economics of expectations and macroeconomics itself are largely coextensive. the trigger of this transformation was, as is well known, the rational expectations revolution, which started with the pioneering work by robert lucas ( 1972, 1973 ) and thomas sargent and neil wallace ( 1975 ). 1 the upshot of the rational expectations hypothesis is that – at least in a world in which information is largely publicly available and speedily disseminated – individuals should not make predictable errors when formulating conjectures about their future. this does not imply that individuals will invariably forecast accurately if random movements are inevitable