##ration in money and credit growth, and a precipitous fall in output. despite our humble performance as economists in forecasting this specific sequence of events, no one can credibly claim that what actually materialised was the most likely among a range of possible scenarios. i think it is fair to say that in order to contain risks to price stability – whether to the up or the downside – there was a pressing need to head off these excesses, instead of dealing with them after the fact. irrespective of the conjunctural assessment, of how these excesses might eventually unwind and of whether or not this process might affect the financial system, such a response was clearly needed. being agnostic about monetary developments would not have been appropriate. to conclude : the improvement in our tools has been evolutionary, rather than revolutionary. a high degree of continuity has been maintained, as our results support the monetary policy strategy. progress has been achieved through the pursuit of our enhancement agenda, but open questions remain. because of the current financial stability issues, we have been applauded for the monetary analysis, but we are again called to limit its scope. previously we were asked to plug monetary information into an inflation forecast. now we are being asked to plug it into the emerging framework for macro - prudential analysis. as a by - product, monetary analysis may both help and be helped by the analysis of bank balance sheets for macro - prudential purposes. however, we do not want to limit monetary analysis to this end. we need to maintain a comprehensive view of the transmission of money to the economy and to focus on pursuing price stability, in line with our mandate.

- absorbed without posing any risks to price stability. another scenario sees such trends as harbingers of changes in spending on goods and services, thereby affecting price developments. yet another scenario could be that increased money holdings may be associated with increased purchases of assets and higher asset prices. if sustained, wealth effects would ultimately exert upward pressure on consumer prices. if this is not sustainable, a subsequent bust is likely to create downside risks to price stability. only in this latter sub - case would we be confronted with financial stability issues too. but in all cases, the long - run relationship between money and prices is preserved. enhancing monetary analysis let me turn to the more central questions. recognising the distinctive role that money plays in the economy does not tell us how we should conduct monetary analysis. in the light of our analysis, how does the transmission from money to prices work and how precisely is it supposed to inform the policy - maker? i cannot provide you with a static toolkit to answer these questions. as in any other field in economics, we have continuously refined and updated the tools in the face of constant structural change. in spring 2007 the governing council endorsed the pursuit of an agenda to enhance the ecb ’ s monetary analysis. why did we start this? how did we come to organise it? finally, what have we achieved over the past three years? 1. reasons for enhancing monetary analysis looking back, i must say that the timing was most opportune. m3 had persistently been growing, far in excess of the reference value, and had actually started to increase by doubledigit rates compared with a year earlier. what was going on? did this reflect an underlying trend? how would this end? these developments seemed to expose a number of shortcomings in our analysis. the expert ’ s judgement was that between 2001 and 2003 portfolio shifts into m3 owing to heightened economic and financial uncertainty had pushed m3 headline growth above its underlying trend. but this was not fully reflected in our modelling tools. over the past decade as a whole we have experienced a continual process of financial innovation and structural change. we have constantly needed to adapt, refine and update our tools. in addition, these tools could not describe the multifaceted way in which monetary trends may transmit to the economy. until then, we had relied mostly on partial equilibrium, reduced - form models. they served us well in forecasting, but failed to capture structural or behavioural interpretations of monetary trends. this would