mario draghi : on the importance of policy alignment to fulfil our economic potential text of the 5th annual tommaso padoa - schioppa lecture by mr mario draghi, president of the european central bank, at the brussels economic forum 2016, brussels, 9 june 2016. * * * the footnotes can be found at the end of the text. in a speech in vienna last week, i explained why monetary policy could deliver the appropriate level of stimulus to the economy, even in a setting where interest rates are close to their effective lower bound. [ 1 ] as inflation is ultimately a monetary phenomenon, a committed central bank can always fulfil its mandate. and that is true independently of the stance of other macroeconomic policies. but monetary policy does not exist in a vacuum. the situation of central banks is better described as independence in interdependence, since other policies matter a great deal. they can buttress or dilute the effects of our policy. they can slow down or speed up the return to stability. and they can determine whether stability is accompanied by prosperity, which is directly relevant to the social cohesion of the euro area. it is these interactions, and why they matter, that i would like to talk about today. policy interactions in stabilising the economy the objective of the ecb is defined as delivering a rate of inflation below but close to 2 % over the medium term. but the medium term is not a fixed period of time. when faced with adverse shocks, the pace at which monetary policy can bring inflation back to the objective depends on two factors : the nature of the shock itself, and the conditions in which monetary policy operates. some types of disturbance will inevitably depress inflation for longer than others and make the return to the objective slower. the recent succession of global oil supply shocks is a prime example. in that context, the job of monetary policy is not to fight short - term shocks to prices, but to prevent them from feeding into longer - term inflation dynamics – or put another way, it is to make sure that the effect of shocks on inflation is no more persistent than it needs to be. so when we talk about returning inflation to our objective without undue delay, this is what we mean. the return to price stability should take no longer than implied by the nature of the shocks we are facing. but this is not entirely dependent on our actions, due to the second factor – the conditions in which we operate.

in the domestic economy, are currently insignificant ; overseas economies are likely to continue expanding ; and there has been progress in structural adjustments. the economy is likely to emerge from the current temporary pause and continue to recover. with time, the economic outlook visualized by the bank will gradually take more concrete shape, as the economy moves more clearly onto a sustainable recovery path. v. assessment of the decline in prices japan's economy is experiencing its third recovery phase since the 1990s, during which period the bank has been conducting an accommodative monetary policy. in the four years between 1991 and 1995, the official discount rate was cut from 6 percent to 0. 5 percent ( it currently stands at 0. 1 percent ). faced with continuing weakness in the economy, however, and with prices still falling, the bank embarked on the zero interest rate policy in 1999. now, in a situation where short - term interest rates are constrained by the zero bound, the bank is providing more ample liquidity to financial institutions through its " quantitative easing policy, " and has made a commitment to continue with this policy until the year - on - year rate of change in the consumer price index ( cpi ; excluding fresh food, on a nationwide basis ) registers zero percent or higher on a sustainable basis. by implementing drastic monetary easing, the bank has sought to avert the risk that a vicious cycle, involving the translation of price declines into reduced corporate profits, depressed economic activity, and hence further price declines, could impair the monetary policy goal of price stability over the medium to long term. when general prices, which are the yardstick for evaluating individual prices, fluctuate on a large scale, households and firms have difficulty in accurately distinguishing a price fluctuation caused by changes in the supply and demand balance of an individual good / service from a fluctuation caused by a change in the general price level. this results in distortions in the efficient allocation of resources in the economy as well as increasing uncertainty about the future. moreover, a decline in prices generates the following three problems. first, real wages adjust slowly when there is downward rigidity in nominal wages, and this impacts negatively on corporate profits and unemployment. second, a rise in deflationary expectations produces an equivalent rise in real interest rates. typically, nominal interest rates would be reduced to counteract this rise in real interest rates, but when an economy comes up against the zero bound on nominal interest rates, it is possible for real interest rates to