fallen too. but apart from a short, temporary blip at the end of 2016, the gap between market - based medium - term inflation expectations in the united states and the euro area is the widest it has been for more than four and a half years. this suggests that idiosyncratic factors are at work too. i would argue, though, that this is unlikely to be related to concerns about the ecb ’ s credibility. a breakdown of inflation - linked swap rates into expected inflation and an inflation risk premium suggests that medium - term inflation expectations have remained close to levels consistent with price stability. you can see this on the left - hand side of my last slide. this is in line with our reading of survey - based inflation expectations. 11 / 14 bis central bankers'speeches rather, the marked fall in the inflation risk premium suggests that investors assign only a small probability to inflation turning out to be higher than expected. again, this is a global phenomenon but in my view it is also linked to the unique institutional architecture that sets the euro area apart from other constituencies. 11 it relates to the question of how monetary and fiscal policies can optimally interact and reinforce each other in an environment in which policy space is significantly smaller today than it was before the crisis. our response to such concerns should not be to challenge our institutional arrangements. it should not be about blurring the lines between monetary and fiscal policies. central bank independence, which has clear and indisputable benefits, is a public good that needs protection. instead, our response should be about strengthening complementarities. ecb research shows that, during the early stages of the latest recovery, monetary policy was the dominant driver of growth. you can see this on the right - hand side. other policies subtracted from growth. this has changed more recently. the euro area aggregate fiscal stance will be slightly expansionary in 2019, and will thereby support monetary policy. but to do it in a sustainable way, it needs to be adequately distributed : while countries that have fiscal space should use it, in countries where government debt is high, rebuilding fiscal buffers is the best contribution to support the single monetary policy. and while not all countries have the space to spend more, all have the opportunity to spend better. 12 12 / 14 bis central bankers'speeches if fiscal policy preferences contribute to disinflationary concerns – for example, by holding back public investments in education, future technologies and research and development – then they directly counter

rates, reflecting the price stability objective of monetary policy, tend to rise in response to increases in future inflation pressure. all of these key macroeconomic variables are therefore linked together by economic behavioural tendencies. we say “ tendencies ” because other things than those mentioned matter too, and may at times be substantial drivers of the patterns we see in the data. for example, a major source of exchange rate fluctuations in new zealand is the outlook for the world prices of our commodity exports and the terms of trade. housing investment moves quite substantially with the ebbs and flows of net migration. government spending and other fiscal policy changes are a further source of demand shock. bis central bankers ’ speeches the role of models and the need for judgement the overall variation in the data can therefore be viewed as a combination of the sequence of shocks and the responses of the economy to those shocks. one major task of the economic analyst is to disentangle the two, at least conceptually. one tool we use to help with the task is a structural forecasting model, which continues our long tradition of using such models in forecasting and policy analysis. the model is calibrated to the “ typical ” economic behaviour observed over the past two decades of price stability in new zealand, and embeds the fairly standard views of economic behaviour outlined above. its key features include intuitive economic mechanisms, a relatively simple structure, and adaptability to accommodate a range of economic circumstances. using a model provides a number of benefits. it enables us to link policy decisions to our objectives and to the economic outlook, to consider simultaneous shocks and interactions among economic variables systematically and consistently, and to ensure that there is some consistency in interpreting the flow of data between forecast updates and policy decisions. but even the most advanced models can only be very abstract representations of the economy, and our forecasting model is deliberately designed to be relatively simple and adaptable. too much complexity would make it difficult to understand the transmission mechanisms and dynamics in the model, and would be unlikely to improve forecasting accuracy materially. judgemental input to any model and adjustment to the model ’ s outputs are therefore a necessary part of building up the forecast – and indeed the process of adding judgement itself helps us form views about the outlook in a systematic manner. there are three main motivations for adding judgement currently. firstly, responses to rare events such as the global financial crisis and the canterbury earthquakes will, by design, not be picked up in the forecasts of a model that is cal