economy is very complicated, and in many cases not fully understood. the famous black box monetary economists talk about. finally, the problem of time inconsistency applies to monetary policy as well. monetary authorities may be tempted to create unexpected inflation to stimulate the economy in the short run. eventually, economic agents will revise their expectations and the result will not be a higher growth rate, but a higher rate of inflation instead. hence, playing the monetary piano is perhaps even more difficult than playing the fiscal violin. fiscal policy co - ordination against this background, let ’ s turn to discussing economic policy co - ordination in the context of emu, starting with the co - ordination of fiscal policies. as i have already argued, playing the fiscal violin is very difficult. by definition, it is even more difficult to prevent fifteen eu fiscal violinists to play out of tune. do my critical observations rule out any co - ordination, at any time? no, under certain special circumstances, fiscal policy co - ordination can be welfare - improving. this assertion is based on a conventional game - theoretical model : fiscal policy - makers maximise independently of each other - a welfare function in which the spillovers of their actions to other players are neglected. the joint welfare of the economies involved increases if fiscal policies are subsequently co - ordinated and policy makers take into account the consequences of their actions on the other players of the game. however, given the caveats mentioned, we have to conclude that the scope for active fiscal policy - making is limited. only in very specific circumstances, the ecofin council should consider the possibility of fiscal policy co - ordination. for instance, when there is a risk of overheating or a common recession, or when the euro area is faced with a persistent balance - of - payments deficit. the basis for the co - ordination of fiscal policies is the multilateral surveillance procedure provided for in article 103 of the ec treaty. in my view, it is possible to elaborate the so - called broad guidelines of the economic policies of the member states, which the ecofin council adopts in conformity with article 103, and include fiscal policy co - ordination. so far, these broad guidelines have been very broad indeed. in the future, they should address individual countries more specifically. when a member state does not comply with the broad guidelines, specific policy recommendations can, and should, be given to the member state concerned. when appropriate, these recommendations should be published. the multilateral surveillance

of things since i thought the world was flat. one is that the objectives of monetary policy should be modest. fine - tuning economic growth has always been a too ambitious goal in a world with long and variable lags in monetary transmission. a clear focus on low and stable inflation can safeguard central banks against the temptation of activism. given current uncertainties, monetary authorities must be particularly cautious in interpreting the output gap. they have to remain firm in reaction to actual inflation and other relatively reliable indicators of inflation risks, such as excessive wage growth. as a side remark, i add that, in theory, capital account liberalisation and trade openness warrant a sharper focus of monetary policy on price stability rather than output stabilisation. 7 international capital mobility, as well as broader access to financial markets, creates new opportunities for households to smooth consumption over the years. free international trade allows for specialisation in domestic production. as a result, it might be possible to disentangle consumption and production to a higher extent than in the past. in other words, households can cushion changes in production without intervention by the central bank. i would like to conclude with a warning. a focus on price stability is more complicated than it sounds. low and stable consumer price inflation is no reason for complacency. in spite of consumer price stability, asset price inflation may signal underlying imbalances, such as an overoptimistic risk assessment by financial market participants that keeps long - term interest rates at unwarranted low levels. monetary policymakers must be forward - looking, and assess possible divergences between real and nominal factors in the area of monetary aggregates, credit and asset markets. how this should be done in practice is a difficult question that deserves further elaboration. i won ’ t answer it now. time is running out. sometimes it is better to stop before one has finished. athanasios orphanides ( 2003 ) the quest for prosperity without inflation, journal of monetary economics, vol. 50, nr. 3. assaf razin and prakash loungani ( 2006 ) globalization and equilibrium inflation - output tradeoffs, nber working paper nr. 11641.