in average inflation across euro area countries could exacerbate the cost of downward nominal rigidities in countries with lower inflation. against the background of these considerations, some positive inflation rate is thought to “ grease ” the wheels of real adjustment in the macro - economy to various shocks, allowing real wages to moderate in response to, say, unfavourable supply shocks even in the absence of conspicuous – and possibly politically infeasible – nominal cuts. coenen ( 2003 ) analyses the implications of the zero lower bound on macroeconomic performance under different assumptions regarding the characteristics of the euro area inflation process, notably the degree of its persistence. his results suggest that the performance of the euro area economy could deteriorate somewhat for inflation targets set below 1 percent. klaeffling and lopez perez ( 2003 ) study the level of inflation that maximises the welfare of a representative agent within the framework of a non - linear neo - keynesian rational expectations model. they find that the probability of hitting the zero lower bound on nominal interest rates increases rapidly as the inflation target drops below 1 percent. this conference adds evidence and modelling discipline to this issue. the scant data observations that we possess indicates that nominal wage cuts appear feasible and in fact all but rare if one tries to measure the skeweness of the frequencies of wage adjustments. provided the monetary regime in place is properly communicated by monetary authorities and solidly internalised by social partners, the economy appears capable of sectoral and macro - wage adjustments if macroeconomic circumstances so require, even at very low rates of expected and realised inflation. so, do wage rigidities build a valid case against very low inflation for modern economies where means of communication and economic literacy have progressed as never in the past? is the case for positive inflation predicated on wage rigidities perhaps over - stated and based on a macroeconomic and institutional landscape that have long ceased to exist? i sense that we do not know enough to venture an answer and i maintain great expectations about the results of an ecb - eurosystem research undertaking – the wage dynamics network – which, i am sure, will shed some light on this key aspect of monetary policy and macroeconomic governance. all in all, a wide consensus has solidified around the fact that the costs involved in sustained inflation – even at relatively low rates – are sizeable and that maintaining inflation at rates relatively far from zero entails asymmetric trade - offs. one has to forgo benefits that are certain –

the system and, in so doing, it validates expectations and preserves the viability of the regime in place? this second stage complicates the analytical setting by adding economic disturbances and imperfect knowledge. shocks can produce occasional departures from price stability. how should a central bank view past slippages? should the central bank always look forward and never pause to reflect on its past record? 1. the quantitative definition of price stability as a medium term objective let me start now with the first part of my intervention. historical experience, empirical regularities and common practice in modern central banking clearly advocate the primacy of price stability as the ultimate objective for monetary policy. price stability has indeed proved to be the best contribution that monetary policy can give to sound macroeconomic management. long term inflation and economic performance empirically, the relationship between inflation and economic performance in the long run has been extensively studied. simplifying, one could argue that the famous phillips curve has been rotating in the minds ( and charts ) of macroeconomists in the last 35 years or so. it was positively sloped when i studied macroeconomics : a little bit more of inflation was supposed to bring a little bit more of real income as a permanent effect. then, it became vertical, as rational expectations advocates belied the samuelson - solow consensus model and drew attention onto a principle that had long been discovered and forgotten : monetary neutrality. it is futile for a central bank to manoeuvre inflation in the hope of systematically stimulating growth, as this policy is doomed to failure in the end, and produces inflation as the only certain outcome. in more recent years the measured slope has bent to negative. many of the papers presented at this conference give indications that a negative phillips curve in the long run not only conforms to evidence, but is born out of general equilibrium micro - foundations. to be sure, at lower rates of inflation, the empirical long - term link between growth and inflation seems difficult to ascertain, at least on the basis of reduced - form, non - structural analysis. this might motivate the fact that for years – in the absence of data - congruent structural models – the slope issue was considered unsettled. i should note here, to qualify, that – despite these shortcomings – ecb research using sophisticated time series techniques has been successful at extracting more conclusive results from an analysis of the statistical connection between permanent inflation trends and growth. it una