jean - claude trichet : the euro area and its monetary policy address by mr jean - claude trichet, president of the european central bank, at the conference “ the ecb and its watchers ix ”, frankfurt am main, 7 september 2007. * * * ladies and gentlemen, television dramas tend to be made about medical rescue teams, hospital emergency rooms and heart surgeons, not about the internists who regularly take your blood pressure and check your cholesterol. a central bank has one emergency room which – sporadically – tackles casualties of car accidents and applies angioplasty and bypass surgery. these are, for example, the exceptional decisions on the refinancing on the money market to help it normalize its functioning. but these activities – critical as they are to the functioning of the system – make up a small fraction of their duties. central banks are for the most part made up of legions of internists who stare at your x - rays and engage in sober consultations. at the end, they write diagnostic statements based on regularities and new facts – facts that can change your conditions in the longer run. we call regularities the “ deep structure of the economy ”. we call the new facts “ shocks ”. the deep structure is formed by economic institutions, which take considerable time to develop. so central banks, not unlike doctors, take them largely as given. shocks occasionally surprise economic agents, causing them to revise their medium - term outlook. because constant monitoring of regularities and new facts that can change the outlook in a long - lasting fashion is what we practice most often in central banks, central bank watchers should resist the temptation to focus on the drama of emergency medicine. central banking is prevention and regular, unglamorous assistance – the better part of cure. it is concerned always with life - time health conditions, only occasionally with emergency interventions, and never with the application of quick fixes. so i will concentrate on structure and facts that can change the outlook in a long - lasting fashion, not on the drama. and i will give you a diagnosis and draw an inference for monetary policy. diagnosis the diagnostic part of my observations has two elements. one is a basic stylised fact that can be shown – like an x - ray – in a simple picture. the second element consists in a substantial body of evidence on the deep economic structure that forms the landscape in which monetary policy in the euro area has to operate. i will argue that

area inflation has been appreciably lower and more stable, thus benefiting consumers and allowing businesses to make decisions within an economic environment unclouded by the “ fog ” that inflation inevitably creates. in the volatility scatterplot, you would agencies – all data are from the international monetary fund ’ s international financial statistics database. we have considered all the economies for which we could obtain data for both cpi inflation and real gdp. the average value of euro area detrended output under emu, at 0. 5, is exactly equal to the median of the distribution across countries ( see the left - hand panel of the chart ). to put it differently, over the period following the start of emu, half of the countries in the sample experienced, on average, weaker economic conditions, while the other half had stronger pressures on economic resources. it could be noted that the favourable performance of the euro area might be due in part to the fact that the euro area is a collection of economies still lacking complete economic integration and thus over different cyclical phases. however, we have evidence of an increasing synchronisation of cycles within the euro area, which would weaken the argument. find the euro area at bottom - left corner, close to the zero point : low inflation volatility has not come at the cost of larger swings in activity. now, moderate real and nominal volatilities are hard to square – at first sight – with the second element of my diagnosis : a structural environment in the euro area characterised by pervasive rigidities. while the sources of structural rigidities in the euro area are manifold, i will single out one dimension on which we have access to high - quality information, nominal rigidities. here i can build on an extensive body of empirical research into price flexibility that has been assembled by staff of the european central bank ( ecb ) and of the entire european system of central banks in a monumental analytical effort to identify the main microeconomic facts on which the workings of emu are founded. 3 this research comes to one main conclusion. in the euro area, prices are distinctly less flexible than, say, in the united states. prices change infrequently. the frequency of price adjustments – the share of prices in a representative sample of product categories that are changed each month – is low relative to the us record [ table 1 ]. the average duration of a consumer price spell – a measure of the time that it takes for