in general. the american heritage dictionary, for instance, defines persistence as the “ continuance of an effect after the cause is removed. ” when we apply this definition to “ inflation persistence ”, we immediately see that one aspect we have to think about is the “ cause ” - or in the terminology of economists, the “ shock ”. of course, many types of shocks are conceivable, e. g. a preference shock or a technology shock. a central bank of course is especially interested in monetary policy shocks. inflation persistence in structural models taking a more formal approach, inflation persistence can be defined in structural models and within a pure time - series approach. as to structural models, a key aspect is the definition of the equilibrium from which the economy starts and to which it tends to return after the shock. the equilibrium path of see angeloni, kashyap and mojon ( 2003 ). for instance, one project at the bundesbank currently explores the price setting behaviour in germany based on survey data. inflation is then implied by the model structure. for instance, it may be given by a credible inflation target set by the central bank. the response pattern of inflation to shocks can be traced back in particular to the assumptions about price setting behaviour. in this setting, the time that a systematic monetary policy action needs to reach its peak effect on inflation may be employed as a measure of inflation persistence. 3 inflation persistence in pure time series models another strand of research does not rely on particular structural models. rather, the inflation process is specified as a ( univariate ) stochastic process. in these models shocks come as realizations of a single innovation term. unlike with structural models these shocks cannot be given a particular economic interpretation. rather, they are interpreted as the sum of all the various influences that have an impact on inflation in a given period. taking the simplest case of an ar ( 1 ) model, the implied long - run mean of the inflation rate is a function of the intercept and the autoregressive parameter. the latter can be seen as a measure of the degree of persistence : if the autoregressive parameter is small, there will be a strong tendency for the process to return to its long - run mean. the closer this parameter is to unity, the longer it takes for the inflation rate to return to its equilibrium level. for specifying the long run mean of inflation in a univariate time series model, the most naive

. shoe - leather costs, tax distortions and menu costs. moreover, their export industry is expected to lose competitiveness. inflation dispersion and the role of policy with view on inflation dispersion, for a central banker, the natural question of the role of monetary policy arises. monetary policy in the euro area is necessarily uniform ; therefore it cannot exert a direct influence on inflation differentials. in a way, one may even conclude that it should not try to bring down inflation dispersion beyond a certain level. “ breathing ” of relative prices is an essential element of the equilibrating and adjustment mechanism and in that sense a crucial feature of the functioning of market economies. as such, a certain level of heterogeneity in inflation rates can be interpreted as a reflection that necessary price adjustment processes are taking place. moreover, the eurosystem has already taken account of inflation heterogeneity explicitly by spelling out its stability policy objective in terms of a medium - term euro - area inflation rate of “ just under 2 percent ”. given the current dispersion of inflation rates, in my opinion, the safety margin implied in this definition is sufficient to protect all member countries against deflation. however, the eurosystem has to continue to analyse national developments in inflation rates and check if they are compatible with the prevailing price norm. if persistent deviations of a national inflation rate can be traced back to inappropriate domestic policies or other unwarranted domestic developments, such as inadequate wage policies or structural deficiencies, national policy is asked to react, taking area - wide monetary policy as given for their decisions. the effect of structural reforms on inflation differentials can be expected to be ambivalent. due to the different speeds at which structural reforms are being implemented in the various countries, a temporary increase in inflation dispersion may be induced. for example, the deregulation of the telecommunications industry in some countries has led to a pronounced decrease in prices for quite a long time. in the long run, however, retrenching rigidities on product and labour markets is expected to increase an economy ’ s capacity to adjust efficiently to shocks and thus to reduce the probability of enduring inflation differentials. iv. conclusions i think my quick tour through the topics of inflation persistence and inflation dispersion has shown that there are still many open questions left. we still do not know enough about the factors that determine inflation persistence in the euro area ; we cannot even