jean - claude trichet : hearing at the economic and monetary affairs committee of the european parliament introductory statement by mr jean - claude trichet, president of the european central bank, at the hearing at the economic and monetary affairs committee of the european parliament, brussels, 25 june 2008. * * * madame la presidente, mesdames et messieurs les membres de la commission economique et monetaire, je me rejouis d'apparaitre devant votre commission aujourd'hui. je commencerai mon intervention par une evaluation de la situation economique et monetaire, en expliquant les raisons sous - jacentes a nos recentes decisions de taux. ensuite, je vous fournirai de plus amples informations sur les operations de politique monetaire de la bce en reaction aux tensions enregistrees sur le marche monetaire. anschließend mochte ich naher auf die ersten zehn jahre der europaischen wirtschafts - und wahrungsunion eingehen. außerdem werde ich die wichtigsten elemente des neuen strukturberichts des eurosystems uber arbeitsangebot und beschaftigung prasentieren. economic and monetary developments since my previous appearance before the european parliament at the end of march, annual hicp inflation has remained high, at levels significantly above 3 %. this mainly owes to strong increases in energy and food prices. moreover, upside risks to price stability over the medium term have intensified further over the past few months, in a context of very vigorous money and credit growth. looking ahead, the governing council expects inflation in the euro area to remain high for some time to come, before moderating only gradually in 2009. in line with this view, the latest eurosystem staff projections foresee average annual inflation between 3. 2 % and 3. 6 % in 2008 and between 1. 8 % and 3. 0 % in 2009. compared with previous staff projections, this represents a significant upward revision, reflecting higher oil and food prices as well as increasing inflationary pressures in the services sector. the governing council remains particularly concerned that current elevated inflation rates, which have proved higher and more persistent than previously foreseen, may become entrenched in private inflation expectations and lead to second - round

into question these standard models as good and useful representations of how the economy works. several researchers, followers of the paradigm, are now working hard to incorporate as many financial frictions as possible into their models. however, other academics belonging to the core paradigm have been raising more fundamental doubts. for instance, ricardo caballero wrote : “ rational expectations is a central ingredient of the current core ; however, this assumption becomes increasingly untenable as we continue to add the realism of the periphery into the core ”. 1 willem buiter, questioned the paradigm more acidly : “ most mainstream macroeconomic theoretical innovations since the 1970s ( the new classical rational expectations revolution... and the new keynesian theorizing... ) have turned out to be self - referential, inward - looking distractions at best. research tended to be motivated by the internal logic, intellectual sunk capital and aesthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works ”. 2 much earlier, minsky had already stated the same type of acid test “... for an economic theory to be relevant, what happens in the world must be a possible event in the theory ”. 3 under the ideal imagined conditions of prevailing thinking before the crisis, the market mechanism operates smoothly and since financial frictions are disregarded, financial intermediaries were generally absent from macro models and without leveraged financial intermediaries, financial instability is not an issue. it is true that there some frictions linked to the credit channel had been included in macro models, basically related to the financial accelerator developed by bernanke and gertler and gilchrist. 4 this is, however, only a caballero, r ( 2010 ) “ macroeconomics after the crisis : time to deal with the pretense - of - knowledge syndrome ” nber wp n. 16429. buiter, w. ( 2009 ) “ the irrelevance of most ‘ state of the art ’ academic monetary policy ”, available at www. voxeu. org. minsky, h. ( 1986 ) “ stabilizing and unstable economy ” in chapter 12 “ introduction to policy ”, mcgraw - hill professional, new edition, 2008. bernanke, ben, mark gertler, and simon gilchrist, 1999, “ the financial accelerator in a quantitative business cycle framework, ” handbook of macroeconomics, john taylor and michael woodford editors. bis central bankers ’ speeches mechanism