aim of “ below, but close to, 2 % ” was seen to imply a stronger commitment than a standard inflation - targeting regime. but monetary policy in the euro area also faced a special challenge. the ecb was a new central bank operating in a very heterogeneous monetary union, which created a particular imperative to establish inflation credibility. establishing a commitment to controlling inflation was seen as critical to cement lower inflation expectations across the euro area – especially as moderate inflation was a relatively new phenomenon in several member states. over the two decades up to 1999, inflation had averaged above 3 % in 10 of the 12 original members. the decline in inflation in many countries in the run - up to emu was in large part due to expectations of joining, as well as to a number of extraordinary actions taken by national authorities to meet the convergence criteria. from 1989 – 99, long - term inflation expectations had fallen from a range of between 2. 5 - 4. 5 % in the four largest euro area economies to below 2 % across the board. it was now the task of the new central bank to lock in this moderate - inflation 1 / 8 bis central bankers'speeches environment – and it did so successfully. over the next decade, inflation expectations internalised the ecb ’ s commitment to keep inflation down and remained below 2 %. but this process of building inflation credibility had implications for the ecb ’ s reaction function. as a matter of accounting, stabilising headline inflation largely caused by its volatile components must mean that core inflation adjusts downwards. rolling cross - correlations between energy inflation and core inflation show that an episode of high energy inflation between 1999 and 2007 was accompanied by a period of rapidly softening core inflation. 1 as a result, between january 1999 and september 2008 headline inflation in the euro area averaged 2. 35 %, while core inflation averaged 1. 7 % and exceeded 2 % less than 15 % of the time. central banks in other advanced economies faced similar challenges and adopted similar strategies. but differences in mandates – and length of track records in fighting inflation – led to differences in how much energy price pass - through to headline inflation others were comfortable accommodating. for example, energy prices in the us cpi rose by 160 % over the same period2 and headline inflation averaged 2. 9 %. the federal reserve reacted less to headline inflation, and core cpi inflation averaged 2. 2 %. 3 the upshot was that the euro area entered the crisis having succeeded in

- free curve – a key benchmark for the pricing of bank loans. asset purchases in tandem compressed yields at the longer end of the curve, pushing down mortgage rates and, 4 / 8 bis central bankers'speeches at the same time, making bank lending to firms more attractive in risk - adjusted terms. and bankbased transmission was amplified by the tltros, which lowered funding costs and increased competition among banks. over time, we also enhanced this framework with state - and date - based forward guidance14, allowing us to rotate the marginal tool for determining the policy stance from asset purchases to forward guidance as the economic outlook improved. today, this forward guidance links our expectations on the path of future rates to the path of inflation towards our aim, leading to automatic easing if the convergence path towards 2 % is delayed. there is mounting evidence that these instruments have been effective. 15 negative rates have proven to be a very important tool in the euro area – and more so than they would have been in an economy like the united states. indeed, the federal reserve eschewed negative rates in part due to concerns about their effects on the money market industry, which are key intermediaries in the us financial system. but this factor is less relevant in the euro area, since many money market funds have been operating as variable net asset value funds, and therefore are more flexible to extend duration to seek additional returns. furthermore, the euro area is a relatively open economy for its size, with total trade making up 51 % of gdp, 16 compared with 27 % in the united states. this means that the impact of negative rates on inflation and financing conditions via the exchange rate is more powerful. in short, faced with a new environment of downside risks and limited conventional policy space, the ecb showed that it had no shortage of tools available to respond. unconventional measures proved suitable substitutes for conventional ones : using market prices to construct a so - called “ shadow short rate ”, 17 the stimulus provided appears broadly in line with the recommendation of monetary policy rules as suggested by recent academic research. 18 our capacity to react in this way was made possible by the flexibility embedded in our mandate – a flexibility that was confirmed by the recent ruling of the european court of justice. this not only affirmed that asset purchases are a legal instrument of monetary policy in the euro area, but emphasised the broad discretion of the ecb in using all our tools in a necessary and proportionate way to achieve our objective. however, although