guide for monetary policy makers. fortunately, the ecb ’ s monetary policy strategy is well - suited to guide monetary policy in the current situation. at a time when academics are reconsidering the mandates and strategies of central banks, it is important to stress that our strategy is comprehensive and robust. all of you are aware of the main elements of our strategy : • the quantitative definition of price stability • the medium - term orientation • the two pillar - based assessment of risks to price stability i would in particular like to highlight that the high priority we attach to the monetary analysis offsets any over - dependence on single, potentially flawed indicators and concepts, such as the output gap. to illustrate this, let me go back to 2005. in that year, the signals from the economic analysis remained rather mixed and our monetary analysis was indicating upward risks to price stability. this led us to increase interest rates in december 2005 – a move widely criticised, also by a number of ecb watchers. in retrospect, however, the strength of the economic recovery from 2006 and onwards showed that our decision was well - timed. moreover, tightening monetary policy at an early stage may have been one important reason why financial imbalances in the euro area could be kept relatively contained, compared with those in some other regions. there are few historical precedents for steering monetary policy back to a “ normal ” path after a prolonged period of a very accommodative policy. but one unambiguous lesson from the past is that an over - reliance on real - time assessments of the state of the economy and a neglect or even misinterpretation of monetary developments can contribute significantly to policy mistakes. the textbook example of a premature tightening is the increase in reserve requirements in the us after the great depression. to counter the potential inflationary consequences of excess reserves in the banking sector, central bank reserve requirements were increased in 1936. in 1937 / 38, the us economy entered a new recession, which was partly blamed on the monetary tightening brought about by the higher reserve requirements. fiscal policy was also tightened. with hindsight, one can say that it was a failure to appreciate the fragility of the recovery and a misinterpretation of the inflationary consequences of the monetary developments that led to a too early exit. in addition, the statistical base on which monetary authorities had to base their assessment of the state of the economy at that time was thin. examples of tardy exits from monetary accommodation

jurgen stark : the ecb's monetary policy – preserving price stability in times of financial distress speech by mr jurgen stark, member of the executive board of the european central bank, at the conference “ the ecb and its watchers xi ”, frankfurt am main, 4 september 2009. * * * ladies and gentlemen, last year at this conference, on 5 september 2008, i said that the previous 13 months had been the most challenging in the ecb ’ s history. the 12 months since then have been even more difficult. we have no reason to believe that the period ahead will be much easier, but there are at least indications that the challenges will be of a different nature. we increasingly see signs that the massive response from governments and central banks has been effective and that the global recession is bottoming out. uncertainty is still high, but one of the main challenges to the maintenance of price stability is likely to be the phasing - out of the extraordinary and unprecedented measures we have taken. the president has just outlined the ecb ’ s exit strategy. i will add to his comments by considering how our monetary policy framework – which has served us well – will be of great help in timing the exit correctly. i will also offer some thoughts on fiscal policy. recognising turning points the principles that guide our decisions are quite clear. our mandate is to maintain price stability over the medium term. as soon as upside risks to price stability emerge in a context of an improving macroeconomic environment, it will be time to withdraw the policy stimulus. furthermore, our independence guarantees that we will take the steps necessary to fulfill our mandate. a key issue will therefore be to correctly identify the turning point in macroeconomic prospects and the emergence of upside risks to price stability. this is in general a very difficult task, but it is even more demanding now, mainly because of the increased uncertainty about the sustainability of the economic recovery and the growth potential of the euro area economy. the decade that preceded the crisis was an exceptionally long period of strong growth in the world economy. the high levels of growth were however based on large and growing imbalances, reflected in asset price and credit bubbles as well as global current account imbalances, which ultimately proved to be unsustainable. this means that some of the growth we experienced in the past was probably above potential, both in the euro area and elsewhere. under these circumstances, elusive estimates of the scale of economic slack are even less reliable as a