long - lasting effects on broader labour market dynamics and, ultimately, wage developments. 13 there is evidence that migration has contributed to dampening wage growth in germany in recent years, thereby further complicating our efforts to bring inflation back to levels closer to 2 %. 14 similarly, in the absence of clear and tangible evidence that the demand for fossil fuels will decline, and with existing conventional oil fields depleting rapidly, persistent energy shocks cannot be ruled out. 15 there is no shortage of examples in history of this causing material disruptions to growth and employment. 16 in the late 1970s and early 1980s, major central banks raised interest rates to prohibitive levels to avoid what central banks call “ second - round effects ” – that is, oil price shocks feeding into core inflation. central banks, including the ecb, were forced to take similar action more recently. 17 i will come to this in a minute. but the point is that, although the “ medium term ” notion offers central banks flexibility that caters for different shocks, there is a limit to how much they can look through persistent supply shocks. the horizon of monetary policy is stretchable but it is not infinite. policy needs to act before risks of broad - based second - round effects materialise. climate change may raise the odds of this happening. relative prices and inflation expectations in the transition towards a low - carbon economy this brings me to the second scenario in which humanity succeeds in accelerating the transition to renewable sources of energy. although clearly more desirable for society, it may also create trade - offs for central banks. along this trajectory, the marginal cost of harvesting renewable energy may become considerably lower and more stable than in the current regime, in which changes in the effective supply of oil have been a recurrent source of disruption. 18 in other words, a lasting shift in the energy mix can be expected to persistently change relative prices. although such a change should in principle not bear consequences for monetary policy, if large and persistent enough, it could feed into expectations and affect aggregate inflation. to see the consequences for monetary policy, consider the events of recent years. a sharp fall in commodity prices pushed headline inflation into negative territory towards the end of 2014. but because the fall in commodity prices proved so persistent – headline inflation remained close to zero until late in 2016 – we saw growing signs that firms, households and financial market participants had started revising down their medium to long - term inflation expectations, away from the levels we consider as being consistent

persistence and size. if the shock is thought to be short - lived, and unlikely to affect the medium - term inflation outlook relevant for monetary policy, we usually “ look through ” the shock – that is, we tolerate its temporary effects on inflation without taking any action. if the effects prove more persistent, however, and are at risk of spreading more widely through the economy, monetary policy action may be warranted. the impact of climate change on monetary policy it is fair to say that most weather - related shocks have been short - lived and contained – at least so far. this year ’ s extremely hot and dry summer, for example, meant smaller harvests for many european farmers. but its overall price effects have been limited to vegetable prices, and will probably prove to be temporary. similarly, although the flooding in june 2013 was the most severe in germany since the 1950s, its macroeconomic impact was limited. as a result, the ecb, in its short history, has never yet been compelled to take action in response to climate - related shocks. so far their largely temporary effects on output and inflation have allowed us to look through them. this meant that central bankers thought the horizon of climate change was extending well beyond the one of monetary policy. but this may change. indeed, i would argue that the horizon at which climate change impacts the economy has shortened, warranting a discussion on how it affects the conduct of monetary policy. that is, climate change is likely to affect monetary policy one way or the other – whether it 2 / 9 bis central bankers'speeches is left unchecked or humankind rises to the climate change challenge. this is my second corollary. let me start with the more disturbing scenario in which both the private and the public sector fail to take prompt action to cut co2 emissions in line with the cop21 commitments. on this trajectory, climate change is likely to affect the conduct of monetary policy in three important ways. the first relates to our ability to correctly identify the shocks hitting the economy. in recent years, for example, we have repeatedly observed an unusual blip in economic activity in the united states in the first quarter. this has often been attributed to a harsh winter, despite best efforts to seasonally adjust the data. but causality is inherently difficult to establish. indeed, statistical analysis has challenged the hypothesis that cold temperatures are behind the observed deceleration in first - quarter growth. 9 similarly, last month, we saw a puzzling persistence in