countries in the euro area with a history of higher inflation rates tend to rely more heavily on short - term lending and on variable rates. in those countries, monetary policy stimulus affects the non - financial sector considerably faster. as these countries are now experiencing a higher degree of price stability, market participants will feel secure about shifting towards longer - term contracts and fixed rates. this will result in monetary transmission being slowed down. the ultimate effect of those two opposite trends is still uncertain. i tend to lean towards expecting monetary transmission to accelerate. capital markets are dynamic ; they are innovative and they permanently create new instruments that increase flexibility in terms of finance. in flexible financial markets, however, monetary impulses should be passed through at a faster rather than a slower pace. disintermediation in corporate finance coincides with the institutionalisation of savings. private households shift funds from bank accounts into pension funds and mutual fund shares. share ownership – direct and indirect – is on the increase. as the value of equities tends to be more volatile than that of other financial assets, changes in financial wealth may impinge on consumption decisions with greater frequency. however, the wealth effect for the euro area is considered to be rather small. in germany we estimate the marginal propensity to consume out of financial wealth to be about 1 %. that is, an increase in financial wealth of 100 euros would spark additional demand of 1 euro. given this change in investor attitude, should central banks actively target asset prices? the potential influence of asset prices on the economy and concerns about financial market stability lie behind such considerations. however, objections against targeting asset prices by far outweigh any potential benefits. · first, there is the issue of knowing the appropriate asset price level. there is no way for a central bank to know that better than the market. · second, stabilising consumer prices and stabilising asset prices may call for diverging policy paths. central banks may well find themselves faced with the dilemma of having to decide to which goal to give priority. · third, targeting asset prices creates “ moral hazard ”. therefore, it would be unwise for monetary policy to even try to target asset prices. nonetheless, monetary policy contributes to a sound development of asset prices. the ecb ’ s monetary policy strategy emphasises money supply in the first pillar of its strategy. an adequate money supply – that is, money supply which is in line with potential output growth – is a necessary condition for preventing the emergence of speculative

inflation and generates an economic slump. the low inflation environment creates some new questions about how to operationalise the medium term. for instance, the existence of large and persistent disinflationary shocks related to, say, the ability to compare prices more actively via the internet and diversify suppliers is likely to call for more flexibility. but a persistent failure to meet the inflation aim can feed into inflation expectations and would call for a shorter policy horizon. we also need to reflect on our two pillar approach for assessing developments in the economy, which uses both economic and monetary analysis. cross - checking between the two helps determine the risks to price stability. the monetary pillar could in principle be enhanced to provide information on financial stability which – over longer time horizons – could be relevant for the inflation outlook. central banks have also considered adding a backward - looking element to the policy horizon in response to the low inflation environment. in the ecb ’ s case, the reference to underlying inflation dynamics in our forward guidance means that we already look at the past when deciding whether to change policy. the wider discussion today, however, is whether central banks should commit to explicitly make up for inflation misses when they have spent quite some time below their inflation goals. if credible, such a strategy can strengthen the capacity of monetary policy to stabilise the economy when faced with the lower bound. this is because the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates. [ 2 ] while make - up strategies may be less successful when people are not perfectly rational in their decisions [ 3 ] – which is probably a good approximation of the reality we face – the usefulness of such an approach could be examined. the third issue is the measure of inflation that lies behind our inflation aim. the harmonised index of consumer prices ( hicp ) has served us well so far and is continuously being improved. examples of these improvements include how it accounts for quality change, annual changes in consumption weights, more granular categories of expenditure and more timely data. at the same time, our economies are changing increasingly quickly. we need to keep track of broad concepts of inflation that capture the costs people face in their everyday lives and reflect their perceptions, including measures of owner - occupied housing. this is not about moving the goalposts for monetary policy. it is about future - proofing how we measure inflation. but we also need to recognise that adjustments will present issues in terms of reliability and frequency of the data. likewise, to