zero trend inflation, working paper 2006 - 34 ( ottawa : bank of canada, 2006 ). other with laval professor kevin moran. 6 their early results suggest that this is an avenue worth pursuing further. but while there may be benefits to be gained from a lower inflation target, there may also be costs involved in getting there. as i mentioned earlier, canadians'expectations of inflation have now become firmly anchored on 2 per cent. adjusting those expectations down to a lower level, say 1 per cent, may not be easy, although the cost of lowering inflation expectations can be expected to be lower than when inflation targeting was first adopted, given the credibility that the bank – and our inflation - targeting framework – have acquired. however, the lengthening of non - indexed wage and debt contracts would raise some transition costs. two main arguments have traditionally been advanced against the idea of targeting a lower inflation rate. the first is the concern about downward wage rigidity : that it is more difficult to adjust real wages downwards in an environment of very low inflation because this will likely involve cuts to nominal wages. the second argument is that central banks could have problems implementing a stimulative policy in a very - low - inflation environment because nominal interest rates cannot go below zero. with respect to downward wage rigidities, research described at the time of the 2001 renewal of the target, 7 as well as labour market developments generally, do not appear to provide a compelling argument against a lower inflation target. but the zero - bound constraint on interest rates remains a critical issue. the adoption of price - level targeting, however, could help central banks deal with the zero - bound constraint. so let me now turn to the topic of price - level targeting. a target for the price - level path? the essential difference between a target for the price level ( which could rise over time ) and an inflation target is that under pure inflation targeting, past deviations from the target do not have an impact on the future targeted rate of inflation. movements in the price level that are perceived to be " one - off " events are ignored. bygones are bygones. but with price - level targeting, past inflation performance does matter. if inflation had been below trend, causing the price level to fall below target, monetary policy would need to generate above - trend inflation for a while in order to return the price level to the target over time. symmetrically, if inflation had been above trend, lifting the price level above its target,

measures will expand the eurosystem ’ s balance sheet towards the levels prevailing in early 2012. and in this context, the addition of purchases of covered bonds to our abs purchases will allow us to conduct interventions on a scale that will achieve the intended effects in terms of portfolio rebalancing and signalling. let me underline however that contingent on outcomes, we are committed to recalibrate the size, pace and composition of our purchases as necessary to deliver our mandate. this is why the governing council has tasked ecb staff and the relevant eurosystem committees with ensuring the timely preparation of further measures to be implemented, if needed. conclusion let me conclude. for all the reasons i have mentioned, it is essential to bring back inflation to target and without delay. monetary policy can and will do its part to achieve this. but it is also clear that, as monetary policy works on the demand side of the economy, other policies can assist in this process – or at least not counteract it. this means that the aggregate fiscal stance of the euro area has to be consistent with our position in the cycle. and it means that this fiscal stance must be achieved in a confidenceenhancing way – that is, consistent with the fiscal governance framework – otherwise lack of confidence will undermine investment and offset the positive effects of fiscal policy on demand. and as investment does not only create current demand, but also future supply – by raising growth potential – appropriate structural policies are also a key part of the policy mix. we need to create a business environment where new investment is attractive. and this in turn would also help monetary policy to reap its full effects. in short, there is a combination of policies that will work to bring growth and inflation back on a sound path, and we all have to meet our responsibilities in achieving that. for our part, we will continue to meet our responsibility – we will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us. if on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases. bis central bankers ’ speeches