of this, without the rescue packages to which germany has made a decisive contribution, the adjustment process would inevitably be even more arduous and abrupt. the crucial factor is that this adjustment process is already underway : unit labour costs in the deficit countries are on the decline, considerably so in some cases, and germany ’ s current account surplus with the rest of the euro area at the end of 2011 was only just around one - half of the just over eur 100 billion back in the year 2007. structural reforms, including labour market measures, are a major underpin of this process. as the reforms usually affect large sections of the population, they initially often come at a high political and social cost. however, the answer to this problem cannot be to drip - feed the adjustments over time ; on the contrary – making a quick, clean break is better for swiftly reaping rewards and opening up prospects for the future. 4. conclusion efficient labour markets are a key factor in overcoming the crisis. decisive action must therefore be taken to tackle the prevailing deficits so as to enhance the growth potential of europe as a whole. by contrast, calls from various quarters for an artificially induced deterioration of competitiveness in the surplus countries, macroeconomic fine - tuning or a simple redistribution of burdens would be of no help to europe ; in fact, quite the opposite. policymakers are thus called upon to do their bit at european level and in the member states. and monetary policy is called upon – not to alleviate the failures of policymakers in resolving problems, but to continually reiterate that ensuring price stability is the primary and most important contribution of monetary policy to the stability of the monetary union. it must continually reiterate that this contribution can only be made by central banks that are institutionally and de facto independent and have a clearly defined mandate. with this brief and – some will certainly think – obligatory warning against the misappropriation of central banks, i shall leave the matter there – as a bundesbank official, i hope you will forgive me for this “ ceterum censeo ”, or mantra. thank you very much for your attention. i now wish you a pleasant and stimulating evening at the deutsche bundesbank ’ s reception. darvas, zsolt ( 2012 ) : “ intra - euro rebalancing is inevitable, but insufficient. ” bruegel policy contribution 2012 / 15, august. bis central bankers ’ speeches

the price - resetting firm sets a higher price, as it anticipates that trend inflation is going to erode its relative price in the future. as a consequence, the relative importance of current marginal costs, and therefore of the output gap, decreases. thus, if the central bank raises the inflation target, the ( short - run ) new keynesian phillips curve flattens, and the inflation rate becomes less sensitive to variations in current output. or, to put it differently, for a given change of the inflation rate, the central bank has to change its policy rate correspondingly by more. it therefore loses some of the additional wiggle - room gained through the higher target. the relevance of this trade - off depends on assumptions regarding the price setting behaviour. according to jordi ’ s model, the optimal inflation target for the euro area is 1. 5 %. when parameter uncertainty is allowed for, the figure increases to 2. 2 %. and each fall of the natural rate of interest by one percentage point should lead to an increase of the inflation target by 0. 9 percentage point. in my opinion, contributions like jordi ’ s are particularly helpful as they provide a workable framework within which to weigh different trade - offs inherent in an economic policy decision. as with all models, the paper abstracts from certain aspects in order to zoom in on the interaction of a particular set of variables. in this case, i believe that some of the aspects not included in this model might shift the overall assessment of the benefits and cost of a higher inflation target significantly. the risk of de - anchoring inflation expectations seems particularly relevant in this regard. ben bernanke once put it like this : “ if we were to go to 4 % and say we ’ re going to 4 %, we would risk a lot of … hard - won credibility, because folks would say, well, if we go to 4 %, why not go to 6 %? it ’ d be very difficult to tie down expectations at 4 %. ” 16 as we describe in our most recent monthly report, which was published earlier this week, bernanke ’ s claim can be supported by a prototypical new keynesian framework with adaptive learning and a central bank following a simple taylor rule. here, a higher inflation target makes reaching a stable equilibrium more difficult. moreover, research by klaus adam and henning weber suggests that the optimal rate of inflation at the firm level has declined in the us over time, as