argues that policy - makers should keep inflation below 6 percent to avoid a negative impact on growth. • mubarik ( 2005 ) using time - series data for pakistan from 1973 to 2000 3 finds that inflation in excess of 9 percent harms short - run growth in pakistan. • hussain ( 2005 ) estimates thresholds of 4 – 6 percent beyond which inflation adversely affect growth. furthermore, inflation hurts growth by making financial intermediation costly as high interest rates raise costs and lower long - run real returns for the corporate sector, while introducing adverse selection and moral hazard problems. lags in transmission mechanism. empirical evidence indicates that there is a 6 - 24 months time lag in developing economies in the transmission of monetary policy impact on aggregate demand. in pakistan, studies point that this lag is in the range of 12 - 18 months. it is because of this that the tolerance level of the economy for the fairly accommodative and easy monetary policy adopted over fy00 - 04 was remarkable as inflation remained low over this period with an average level of 3. 9 %. admittedly, fiscal borrowing pressures during this period being low also provided scope for private sector credit growth. however, monetary overhang of few years of accommodative monetary policy finally generated inflationary pressures which remained entrenched for some period. consequent monetary tightening, now in place for over one year, is eventually showing signs of transmission channels working as evident from cpi deceleration. mohsin s. khan and axel schimmelpfennig : inflation in pakistan : money or wheat? paper presented in sbp conference, november 2005. the authors use the hodrick - prescott filter to reduce volatility in the data which potentially removes relevant information. furthermore, in a single country case, the threshold will be restricted to be within the range of inflation experienced by that country. an sbp working paper on the transmission mechanism of monetary policy 4 studies the relative importance of four channels through which monetary policy shocks are transmitted in pakistan. while other transmission channels have yet to fully manifest themselves, banks have been observed to play a major role in the transmission mechanism with private sector credit as the leading indicator. but monetary policy transmission mechanism of this channel is weak because of the low impact of the interest rate channel, and also because the transmission mechanism cannot be developed on the basis of the short end of the yield curve, it needs a spectrum of rates in order to develop further, and the government has

needs to be our clear sense of direction. keynes ( 1937 ), “ how to avoid a slump ”, article in the times, 12 january 1937. sound public finances and a stronger and more resilient banking sector will strengthen the fundamentals of the european economy. already prior to the crisis, the euro area was among the least volatile economies in the world. volatility of both inflation and output growth were significantly lower than in other industrial countries and inflationary expectations remained remarkably stable. once enacted and implemented fully, the new measures of fiscal consolidation and financial reform will help foster these sound fundamentals and turn the current cyclical upturn into sustained growth. the latest signs that we are receiving from the economy are encouraging. exports are recovering at a steady pace. industrial production is rising and employment is stabilising. this fundamentally distinguishes the current situation from the situation that we faced last year. but as i have said, the crisis is not yet over. for the ecb ’ s role as the guardian of the euro, this means, first of all, to remain faithful to its primary mandate of delivering price stability in the medium term, in line with its definition. in the exceptional financial market circumstances that we are experiencing since 2007 we have decided some non - standard measures to help restoring a more appropriate market functioning and a better transmission of our monetary policy. but our monetary policy stance has always been to deliver price stability and be credible in this delivery with a solid anchoring of inflation expectations. the securities markets programme is fully in line with this approach. the governing council is constantly and carefully monitoring all developments and stands ready to do all that is necessary to maintain price stability. later today, jurgen stark will present the outcome of our enhanced monetary analysis that enlarges our toolkit to pursue this aim. beyond our role as guardians of the euro, we also have to deliver on our responsibilities as part of european and global economic governance. in this context, i would like to touch on the work programme of the van rompuy task force, which was established by the european council in march 2010 and in which i am participating. vitor constancio and lorenzo bini smaghi will go into greater detail, and i will highlight a few elements of the task ahead. first, national fiscal reforms – to which i alluded before – need to find an anchor and a collective guarantee in renewed and strengthened institutions for multilateral budgetary surveillance. national fiscal frameworks will receive a blueprint of