for the time being the value of money will depend upon the discretionary judgements of the mpc. for those judgements to command respect, it is vital that the committee demonstrate their determination to react to all signals about the outlook for inflation. it is common – both in the press and within central banks around the world – for discussion of the inflation outlook to be dominated by an analysis of so - called real changes in the economy such as movements in demand or supply and changes in the relative prices of imports or energy. it is true that, in trying to stabilise inflation in the short - term, the mpc will take those events into account. but we know that, beyond the short - term forecasting horizon of up to around three years, inflation has nothing to do with these developments. it is, in the old adage, the result of too much money chasing too few goods. that is why money growth rates and inflation rates are well correlated across countries and over long time horizons. many of the great economists of the past from david hume to milton friedman emphasised the link between money and the price level in the long run. at present the chief executive is jeff llewellyn. why, then, does money not play a more prominent role in discussions of the outlook for inflation and monetary policy? monetary developments can reflect two different causes : changes in the demand for money and changes in the supply of money. they have very different implications for inflation. movements in the demand for broad money, relative to spending in the economy, reflecting changes in the way different assets and liabilities are used in transactions or shifts in portfolio preferences, have no implications for spending in the economy or the path of inflation. they make the relationship between money growth and inflation unpredictable. that contributed to the poor outcomes when explicit money supply targets were used to guide monetary policy in the late 1970s and early 1980s. changes in the supply of broad money, however, will lead to an imbalance in the relationship between money and prices. either spending and the price level will adjust or the central bank will have to alter its policy rate to eliminate the change in the supply of money. the practical problem facing all central banks is how to distinguish between shocks to the demand for money and shocks to its supply. after a period of rapid financial innovation during which shocks are predominantly to the demand for money, it is understandable, though unfortunate, if monetary developments are given insufficient attention in the analysis of the inflation outlook. how should

individual countries, and which help to alleviate the similar regional tensions that arise at the national level, are simply not well - developed at the pan - european level. the maastricht treaty, of course, recognised this risk, and the famous convergence criteria were designed precisely as a means of reducing the risk to manageable proportions by requiring that, before they join the euro club, countries should have achieved at least a minimum degree of macro - economic convergence - demonstrating their commitment to macro - economic [UNK] discipline through both fiscal consolidation and monetary policy directed at effective price, and exchange rate, stability. and there is no doubt that all european union member states have made huge progress towards macro - economic stability over the past few years, which you will find documented in the two “ convergence reports ”. although the emi in particular emphasises the ongoing need in a number of countries to persist in determined fiscal consolidation, it is this progress towards nominal convergence that underlies the european commission recommendation. the nagging doubt is whether this pursuit of macro - economic stability will in fact be maintained - whether the convergence that has certainly been achieved will, in the terms of the treaty, prove to be sustainable. a particular worry is that macro - economic stability, on its own, has not been enough to prevent the emergence of very high, and very different, levels of unemployment in a number of the major continental european economies. unemployment has been for some considerable time, and it remains, much the most urgent and important economic issue confronting us in europe. i don ’ t suggest for a moment that the right answer would be to abandon macro - economic discipline and revert to old - fashioned demand management policies. in anything other than the very short term that would be likely to make matters worse. i share the broad consensus view that europe ’ s unemployment problems originate essentially in rigidities on the supply - side of the economy. the point is that unless we are all more successful in bringing down this structural unemployment, through micro - economic policies designed to improve structural, supply - side flexibility, then some countries could find it difficult to continue to live with a common macro - economic discipline without significant tensions. some people on the continent who basically share this concern are inclined to argue that if the government of a euro - participating country were to find itself in this situation - and given that it would have no macro - economic way out, for example, through exchange rate adjustment, or monetary relaxation, or fiscal stimulus beyond the limits of the stability pact - then