”. the federal reserve has not yet formally adopted a precise, operational price stability or inflation target ( though implicitly a target for core inflation at 1. 75 % - 2 % has recently been used ). we have found the selection and announcement of a quantitative definition of price stability extremely important for policy formulation as well as for guiding and anchoring inflation expectations to price stability. moreover, it provides a yardstick for the assessment of the effectiveness of monetary policy and for democratic accountability. however, despite the adoption of a quantitative definition of price stability to orient our policy, the ecb does not use the term “ inflation targeting ” to describe its own strategy – even if alan tends to put us in the same camp. presumably, there must be some real differences warranting this position, and indeed there are. first, for the governing council of the ecb, inflation projections based on a single model are not the only all - encompassing tool on the basis of which decisions and communication are organised ; our projections are seen as important input to our economic analysis, but are strictly staff projections and one element of our economic analysis. a second major difference is that we assign an important role to monetary analysis in assessing the medium to long - term inflation trends and risks. a final point is that our policy framework has a medium - term orientation but we have eschewed specifying a fixed time horizon for our assessment of the outlook for price stability. at the same time, there are no major differences in the practical implementation of monetary policy strategies among price stability - oriented central banks and, with regard to at least some aspects of the policy framework, remaining differences are diminishing. in recent years, for example, we have observed a greater focus by some inflation - targeting central banks on the medium and long - term horizon and on the role of money and credit growth in determining medium to long - term inflation trends and in influencing asset price dynamics. core versus headline inflation despite the convergence of many aspects of the monetary policy strategies, there are still important differences. one such difference is whether the operational target for inflation should be the headline or a core measure of inflation. alan has declared that he is firmly in the “ core ” camp for several reasons. he argues that a central bank should aim at core inflation because ( i ) it cannot effectively control headline inflation given its inability to offset supply shocks ; ( ii ) it can better forecast future headline inflation on the basis of past core - inflation dynamics, and ( iii ) targeting core

bankers'speeches circumstances and challenges that we face in the pursuit of price stability. making the strategy concrete let me explain how this can be envisaged in practice with an analogy in construction that may speak more to the minds of a general audience than concepts from the world of monetary theorists and lawyers. very much like price stability ensures a solid foundation to support a wellfunctioning economy, in construction concrete is the bedrock of any structure : homes, office buildings, bridges, wind and solar power stations, and so on. this bedrock is made up of four simple ingredients : cement, gravel, sand and water. every ingredient plays its part. cement is the key bonding agent that holds the concrete together. it is the gravel and sand that give it its strength and structural integrity. the water activates the bonding process and also makes the concrete malleable and allows for flexible application. the optimal concrete mix ratio depends highly on where the concrete will be used. generally, the amount of sand and gravel is important for strength and durability, whereas cement and water add to workability. as one might expect, dry environments call for a relatively higher proportion of water in the concrete mixture, while the opposite holds for moist surroundings. exposure to mechanical or chemical erosion also call for relatively less water to maintain durability. environments subject to freezing and thawing benefit from concrete that contains some air pockets, determined by the proportion between gravel and sand. the builder mixing the concrete surely needs to establish what likely conditions the concrete needs to withstand before deciding on the optimal mix. i have come to learn that this concept is known among economists as state and shock dependence of the optimal policy response. and the optimal calibration of the monetary policy compound to maintain price stability is equally dependent on the external factors that have an impact on the economy. our new strategy confirms that the key ecb interest rates play a primary role in this compound, but it also explicitly accounts for the use of other instruments as appropriate. in line with the central banks in other advanced economies, this includes communicating the expected future path of interest rates – also known as forward guidance – as well as asset purchases and the provision of longer - term refinancing operations to banks. the governing council has made clear its commitment to deploying and withdrawing all these instruments to respond flexibly to challenges in a proportionate manner, as we have demonstrated in the past. in our proportionality assessment we are also mindful that monetary policy measures have an impact on