very important result, perhaps the most important, for a central bank whose mandate is to maintain price stability over the medium term. hence, the essence of the existing definition of price stability, namely, a year - onyear increase in the harmonized index of consumer prices for the euro area of below 2 %, was fully confirmed. at the same time, the governing council clarified that in the pursuit of price stability it will aim to maintain inflation rates below, but close to 2 % over the medium term. this clarification emphasizes the need for a sufficient safety margin against the risk of deflation. there are several good reasons for accepting a low rate of inflation. the major concern is the fact that monetary policy may become less effective, if interest rate management by the central bank is constrained by a liquidity trap or a “ zero bound ” problem. ecb analyses show that such constraint should not pose a significant threat if inflation remains sufficiently above zero. the clarification we provided to the price stability definition offers a safeguard in this sense. in preventing the emergence of deflationary and inflationary dynamics alike, a forward - looking orientation of monetary policy is essential. there is no convincing evidence that relying on rigid rules helps in this respect. rather, the medium term orientation of the ecb strategy, with its explicit reference to all relevant indicators of future price developments, provides flexibility and forwardlooking orientation while maintaining a firm reference to the medium term price stability goal. the role of money and the two - pillar framework the governing council confirmed that the two - pillar framework of the strategy is an effective tool to organize the information on different risks to price stability. different types of analysis provide information relevant for price developments at different time horizons. the economic analysis focusing on the most proximate causes of inflation such as cost developments and demand - supply imbalances - primarily contributes to assess short to medium - term economic developments and consequently risks to price stability at that horizon. the monetary analysis - focusing instead on the ultimate monetary determinants of inflation - primarily contains information for assessing price developments at medium to long - term horizons. the economic literature suggests that there is no easy way to bring together the monetary analysis with the economic analysis in a unified framework ; or, as we could say more technically, to integrate money and credit into today ’ s standard macroeconomic models. in this respect, the monetary analysis mainly serves as a means of crosschecking, from a medium to long - term perspective, the short

a systematic way. this did not mean that changes were necessarily needed - any more than a new car necessarily needs repair when it is taken to the garage for its 5, 000 miles checkup! it is true, however, that we undertook our evaluation with an open mind, ready to introduce changes in case our evaluation had suggested the need to do so. there are in my view three areas where a monetary policy strategy plays a crucial role in a central bank, and this is where our attention focused : 1. the strategy should provide a framework for the internal analysis. as such, the framework must encompass and organize all relevant information in an efficient way. it should use the best available research, taking into account all different sources of uncertainty the central bank faces. competing models must be allowed to paint complementary pictures of the economic outlook and the risks to price stability. 2. the strategy should also provide a framework for the debate within the decision making body. from this viewpoint, the strategy must be efficient in terms of allowing the decision making body to examine and weigh all relevant information, encompassing any diversity of views that may exist on the transmission mechanism. 3. finally, the strategy should provide a framework for external communication. here, transparency and effectiveness are linked. effective communication facilitates the transmission of monetary policy decisions to the economy. at the same time, using the same framework for external communication as for internal analysis should guarantee consistency and improve public understanding of how monetary policy is conducted, thereby enhancing transparency and effectiveness at the same time. how was the evaluation conducted? accordingly, we went through several steps. the first was to revisit all the technical issues. all aspects of the strategy were scrutinized, going through a lively internal debate and resulting in a series of technical studies now available on our web site. the key role here was played by the staff of the ecb and of the national central banks, the latter contributing through the eurosystem monetary policy committee. use was made of research accumulated during the recent years, in the ecb and outside, on a number of issues relevant for the strategy, such as the transmission of monetary policy, the determinants of prices, the leading indicator properties of money, credit and other key indicators, and the like. the second step was to reflect on how the strategy has contributed to the debate within the ecb decision making bodies, naturally with a particular focus on the council. in the decade leading up to the emu, a broad consensus on the principles