interest rate changes than in the past. chart 30 share of services in gross value added and sectoral response to contractionary monetary policy shock ( left panel : share of gross value added ( gva ) generated in service sector ( in per cent ), right panel : y - axis : impact of 100 basis point rate hike on regional output in the capital - intensive sector ( red ) and in the labour - intensive output ( blue ) at sample mean ( in per cent ). x - axis : irf ( in years ). ) sources : left panel : eurostat, ecb calculations. right panel : hauptmeier, s., holm - hadulla, f., and nikalexi, k. ( 2020 ), “ monetary policy and regional inequality ”, working paper series, no 2385, ecb. the latest observation is for the third quarter of 2022. conclusion in summary, our monetary policy decisions are best served by relying on a broad analytical toolkit. macroeconomic models provide orientation on how a given monetary policy adjustment should typically affect the economy and inflation, and how the transmission process unfolds, including lags in transmission. but, in tracking the dynamic impact of a policy impulse to its ultimate effects, we also need to constantly monitor progress and update our assessments of how the transmission mechanism is operating under current conditions, with due accounting for the specific configuration of the prevailing financial and economic conditions. applied to the current euro area context, this dual approach leads to an interim assessment that our monetary policy actions are clearly tightening financial conditions, reducing credit volumes and altering the behaviour of households and firms. [ 38 ] at the same time, much of the ultimate inflation impact of our policy measures to date is still in the pipeline. over time, our monetary policy will make sure that inflation returns to our target in a timely manner. but i have also listed some of the sources of uncertainty about the transmission mechanism that call for an open mind about the precise scale of the monetary policy tightening that will be needed to achieve this outcome. furthermore, as indicated in the introduction, the calibration of the monetary policy stance needs to be regularly reviewed in line with the incoming information about underlying inflation dynamics, especially in the context of the remarkable shocks that have hit the euro area and global economies over the last couple of years. the governing council ’ s data - dependent, meeting - by - meeting approach to setting interest rates is well suited to facilitating the necessary ongoing analysis of these issues

weak price pressures. see kalemli - ozcan, s., laeven, l., and d. moreno ( 2015 ), “ debt overhang, rollover risk and investment in europe “, mimeo. kydland, f. and e. prescott ( 1977 ), “ rules rather than discretion : the inconsistency of optimal plans ”, journal of political economy, 85, 473 – 490. barro, r. and d. gordon ( 1983 ), “ rules, discretion and reputation in a model of monetary policy ”, journal of monetary economics, 12, 101 – 120. bis central bankers ’ speeches indeed, eggertsson and pugsley ( 2006 ) show that, in a fragile post - crisis situation where monetary policy is sustaining the recovery, any perception that the central bank is adopting a greater tolerance towards a future regime of lower inflation can have very negative effects. looking at the great depression period, they argue that the return of the us economy to recession in 1937 resulted from a perception that the fed had abandoned its commitment to reflation, creating pessimistic expectations of future growth and inflation that fed into both expected and actual deflation. the economy then became caught in an equilibrium of “ contractionary beliefs ”. 10 third, once central banks let inflation expectations drift away from their previous anchor and fail to counteract this through forceful policy action, there is no guarantee that expectations will naturally settle at another desirable level. as orphanides and williams ( 2004 ) show, it is precisely by defending its inflation objective that the central bank facilitates the public in learning how to process the flow of information, and thereby influences the formation of inflation expectations. 11 without such an orientation, expectations may continue to drift in the same direction, and a re - anchoring of inflation expectations may morph into an outright de - anchoring of inflation expectations with no visible end - point. in such conditions, monetary policy would face an uphill battle to preserve inflation rates compatible with any reasonable definition of price stability. to see this, consider a simple phillips curve framework that relates inflation to measures of economic slack. accommodative monetary policy reduces the degree of economic slack and thereby puts upward pressures on inflation – a move of the economy along a given phillips curve. but when inflation expectations change, this is not the only dynamic pattern taking place. instead, a change in inflation expectations alters the inflation rate to which the economy will gravitate when it