rate of steady state inflation, in which it is emphasised that inflation has both so - called " grease " effects, essentially because it makes the economy more flexible - particularly in the presence of specific downward rigidities -, and so - called " sand " effects, which are mainly due to the fact that inflation leads to more adjustment costs and to excess relative price and wage variability which distorts allocative decisions. the " sand " argument stresses that the existence of nominal rigidities is an important element explaining why inflation is costly and why central banks should maintain price stability. however, central banks also acknowledge the " grease " argument as they typically define price stability as a moderately positive inflation rate. weighing both arguments was one of the reasons why the governing council of the ecb in may 2003 specified that, in the euro area, price stability is to be seen as an annual increase in the area - wide hicp below, but close to 2 % in the medium term. moreover, monetary policy may be faced with a short - run trade - off between inflation stabilisation around the target value and output stabilisation. some contributions during the conference, for instance the keynote presentation which jordi gala will give this afternoon, address these issues in theoretical models. it is however obvious that this topic is also relevant for the actual conduct of monetary policy. indeed, as in recent years we have been faced with a rather unusual clustering of shocks of the cost - push type with an upward impact on inflation in the euro area, the medium - term orientation of the monetary policy framework of the eurosystem induced us to accommodate their first round effects on inflation and to focus on avoiding their having second - round effects in price and wage setting. thus, the flexibility explicitly embedded in the medium term orientation of our monetary policy framework allowed us to take care, insofar as possible, of stabilising output developments, while the mere fact of having a well - specified strategy with a quantified definition of price stability helped us to anchor inflation expectations. another relevant question being raised is how price and wage rigidities are affected by the ongoing process of globalisation. the keynote presentation of andrew scott in tomorrow afternoon's session for instance focuses on how relative prices and mark - ups are influenced by trade integration. ongoing globalisation is indeed expected to strengthen competition and to reduce mark - ups in goods and labour markets. in conjunction with other structural changes resulting from reform efforts, this should lead to a higher steady state

##2 ), imf ( 2022 ) and bis ( 2022 ). 4 ecb ( 2021 ). 5 for more information on forecast accuracy, see also lambrias and page ( 2019 ) and bok et al. ( 2017 ). 6 see chahad et al. ( 2022 ) for a decomposition of forecasting errors in eurosystem / ecb staff projections. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 20221108 icmb public lecture pierre wunsch – national bank of belgium page 4 of 11 there are two main issues related to using r * as a compass for policy decisions. first, there is significant uncertainty surrounding the estimates. the chart refers to the us because estimates for this country are readily available. as can be seen, however, uncertainty is high both within and across models. “ within model uncertainty ” means that the confidence intervals for r * estimates are typically quite wide. it is not uncommon to see a 90 % confidence interval as wide as 2 percentage points below and above the estimates. “ across model uncertainty ” means that r * estimates are model - dependent, so that different models yield different r * estimates. overall, the level of uncertainty is so overwhelming that central bankers should acknowledge that they don ’ t know precisely where r * is. 7 second, the relationship between interest rates and inflation may not be so stable. the idea of r * is that when inflation or inflation expectations are below target, real rates should be brought below r * so as to stimulate economic activity and inflation. but there are reasons to believe that this relationship does not apply under all circumstances. the slope of the investment - savings ( is ) curve may be different for different levels of interest rates. for instance, when interest rates are at low levels and have been for quite some time, the interest rate sensitivity of demand may be reduced as investment projects could be exhausted and consumption cannot be stimulated forever. 8 so, should we, as central bankers, be concerned about this? not if we all agree that measures of r * are indeed too imprecise to inform real - time policy