across countries and its impact on activity – including global spill - overs – and inflation. 6 framing our monetary policy response : the ecb ’ s monetary policy strategy as i said before, it is the ecb ’ s responsibility to preserve price stability in the euro area. given the nature of the recent rise in inflation, the first question we should ask ourselves is how our monetary policy should respond to it. in july 2021, the ecb adopted a new monetary policy strategy, the cornerstone of which is a symmetric inflation target of 2 % in the medium term. the aim of the ecb is therefore not to stabilise current, observed inflation, but to stabilise inflation over the medium run. this medium - term orientation responds to two considerations. first, monetary policy affects inflation with variable lags. the transmission mechanism of monetary policy operates first by affecting banks ’, firms ’ and households ’ financing conditions. this, in turn, affects credit, investment, and consumption decisions. the resulting changes in aggregate demand exert pressure on firms ’ production needs, thus lowering their demand for labour and other inputs, and hence on production costs, and will end up affecting prices. this process however takes time. empirical studies typically show that monetary policy decisions have their maximum effect on inflation after one - and – a - half to two years. therefore, attempting to stabilise observed inflation at all times is a futile, and probably counterproductive task, as it increases the volatility of macroeconomic aggregates. second, the optimal response of monetary policy depends on the nature of the shocks that cause inflation to rise. for instance, an energy shock is typically considered as a supply or “ cost - push ” shock, as it increases production costs for firms. in this case, the central bank faces a trade - off between inflation on the one hand, and economic activity and unemployment on the other : if it reacts too strongly to the increase in prices resulting from the cost - push shock, the output and employment losses caused by the supply disturbance will be further amplified, and unemployment will suffer. if, on the other hand, it responds too feebly, in order to minimise economic and employment losses, inflation may increase too much. the optimal policy in this case is to “ lean against the wind ”, tightening policy enough to allow for a certain transitory increase in inflation above target as well as a reduction in output below its potential level and an increase in unemployment. 7 the previous prescription is based

objectives. in particular, the more confident market participants are in the fed ’ s ability to exit when the time is right, the more effective its purchases will be in stimulating the economy. suppose the fed was indeed successful in reducing long - term interest rates further – what then? some claim that lower rates would have no effect on economic activity – that the fed would be “ pushing on a string. ” this is too dark a view. although the responsiveness of demand to reductions in interest rates is probably lower in a world in which balance sheet constraints are important, the responsiveness is not zero. i believe that it remains significant. even in today ’ s challenging circumstances, lower long - term rates would support the economy through a number of channels. lower long - term rates would support the value of assets, including houses and equities and household net worth. lower long - term rates would make housing more affordable and support consumption by enabling households to refinance their mortgages at lower rates. this would increase the amount of income left over for other spending. of course, this channel can be made more powerful to the extent that further progress can be made in efficient mortgage debt restructurings that allow households with negative equity in their homes to take advantage of the drop in mortgage rates. in addition, lower long - term rates would reduce the cost of capital for businesses, thereby fostering higher levels of capital spending for any given economic outlook. in considering the limits to balance sheet expansion, there are two constraints – one major and one more minor. the first constraint is the risk that the balance sheet expansion might cause inflation expectations to become unanchored, leading to higher risk premia. this risk is presumably greater in a period in which budget deficits are high, as they are today. if exit concerns were to rise as purchases increased, then a rise in inflation risk premia would offset at least some of the expected fall in interest rates. in contrast, the more credible the ultimate exit strategy, the less likely it is that inflation risk premia would go up and the more effective purchases would be in lowering long - term rates. also, the more credible the ultimate exit plan, the more confident investors would be about the fed ’ s willingness to do what is needed to accomplish its objectives. this is important because it would help stabilize longerrun inflation expectations at levels consistent with the dual mandate. the fomc should be able to assure investors that it has both the means and the will to exit when