creation system, or transitory forces driving around transactions habits. they may reflect reversible movements in the preference for liquidity, in - or out - flows of foreign exchange transiting through checkable accounts, or else. in the case of europe, it cannot be ruled out that the process of financial integration may have affected the income velocity of monetary aggregates. in these circumstances, having to hit a constant rate - of - growth target for, say, base money on a near - term horizon would result in ample fluctuations in short - term interest rates. and this instability would likely be transmitted to prices and output causing unnecessary fluctuations in these variables. in this context, the first principle of good policy, prescribing a careful filtering of disturbances, provides important safeguards against such policy - induced instabilities. in fact, it underlies the ecb ’ s decision to adopt a reference value for monetary growth, which is not a monetary target. and it also supports the need to look at monetary developments from a medium - term perspective. nevertheless, as long as money demand relationships are reasonably stable – as has been the case in europe in contrast to the us – information from monetary developments should provide robust indications of medium - term price pressures. paraphrasing an expression of paul samuelson, we were given two eyes : one to watch money and credit aggregates and one to watch everything else. ultimately, these two policy perspectives are to be combined in a single strategy which subsumes them both in a unified – albeit complex – and robust framework for action. this strategy lends policy - makers an accurate perspective over the economy to respond expeditiously to the events, and at the same time insures them against systematic slippage. concluding remarks i shall conclude with a number of observations which have been recurrent in my remarks above. first : there is no simple escape for a central bank from a serious analysis of economic change, which comes in the form of shocks and noise. these changes are often opaque and present themselves in disguise, but they may contain information which cannot be discarded on a priori grounds. there is no escape to a serious analysis of economic perturbations. certainly, following deceptively simple policy rules of one sort or another is no viable cure to complexity. second : the change in money demand is one of the most difficult to decipher. looking ahead, these shocks may even augment in number and magnitude – as has been the case in

the markets ’ likely reaction to the latest indicator, by the markets ’ anticipation of the central bank ’ s response to the latest indicator, and so on into infinity. this mechanism can lead monetary policy gradually astray from its foremost role of providing a firm medium - term anchor for the economy. on the connection between a central bank ’ s predominant focus on price stability, its aversion on real fine - tuning and its credibility assets, see v. gaspar and f. smets ( 2002 ), ‘ monetary policy, price stability and output gap stabilisation, ’ paper presented at the conference ‘ government and the economy : the pros and cons of counter - cyclical macro policy ’ ( new york, 11 july ). for a more precise description of the ecb monetary policy strategy, see ecb ( 1999 ), ‘ the stability - oriented monetary policy strategy of the eurosystem, ’ monthly bulletin, january ; ecb ( 2000 ), ‘ the two pillars of the ecb ’ s monetary policy strategy, ’ monthly bulletin, november ; and o. issing et al ( 2001 ), ‘ monetary policy in the euro area, ’ cambridge : cambridge university press. so, at the risk of oversimplifying, let me now turn to consider two general principles of prudent monetary governance which may help central banks to reconcile the need for prompt action and a firm medium - term orientation. first, a central bank always needs to tailor action upon the origin, the magnitude and the nature of the shocks which hit the economy from time to time. as i tried to argue above, this is a highly demanding exercise, because shocks do not come about with labels : they have to be identified first, in real time. but there are no shortcuts or excuses : no simple rules linking policy to one or two privileged indicators can substitute for an accurate examination of shocks and a careful analysis of their potential for transmission into prices over a sufficiently extended span of time ahead. a corollary to this principle is that the horizon for policy action cannot be set in advance, as i shall argue more extensively below. second, a central bank can benefit from keeping an eye fixed on the single long - term compatibility condition that monetary economics has to offer to practitioners, free of model - specificities and restrictive assumptions. namely, that over a sufficiently extended period of time money should grow at a rate which is consistent with trend growth in real output and the central bank ’ s definition of