 We now come to an absolute highlight of this annual research conference at the ECB. A long-awaited sequel to the meeting of two giants of our profession. We might also call it a clash of the Titans. Paul Krugman and Larry Summers truly need no introduction. We have last seen them at the beginning of this year debating each other on the outlook and the causes of inflation and it was 90% about the US inflation which is of course given where they are based and given the situation in the US as being ahead of Europe at the time, absolutely understandable. This time in the sequel we will want to dedicate some time, hopefully a lot of time to Europe which is at the center of the present storm. The last debate was in January. This was pre-Russian invasion. This was pre-energy crisis. This was even before the upshooting of inflation in the Euro area. So we are very curious what you two have to share with us, your points of view. Paul, can I ask you to go first? Please, the floor is yours. All right, thank you. Thanks for the invitation. So I want to give just a quick analytic perspective. Talk a little bit about the US and then talk about Europe because I have surprisingly diffused convictions about where we are right now. So, okay, I think we have a kind of a shared perspective, I believe, most of us in this field and I think Larry and myself, that roughly speaking we think of inflation as being determined by some measure of capacity utilization, labor market tightness, output gap plus expectations of inflation and then of course with volatile prices. So you want to make a distinction between some kind of underlying measure and the headline inflation rate. There is in all of this an implication that there's some level of unemployment to use star at which actual inflation matches expected inflation. Originally the natural rate according to Milton Friedman, it got renamed the Nehru I think partly because people didn't like the implication that natural sounded like it was good and we didn't want to say that unemployment was good. But I think actually in this case natural is better because the Nehru involves the implicit assumption that expected inflation reflects recent past inflation and so it's a question of inflation acceleration which does not, as I'll explain in a minute, does not look like a good description of where we are in the United States. So actually let's talk about the U.S. for a second. So I have two slides on the U.S. situation. They're not updated for this morning's inflation print which was a little upsetting but don't want to make too much of one month. So if I could have the first slide for a second, if we can get that, can we get it? If not, well, I guess not. All right, let me talk, let me just tell you what's on them. By the numbers, current inflation looks quite a lot like inflation in 1980 which is our nightmare scenario is that we're going to have a replay, that we're going to have to go through a Volcker type period of extremely high unemployment to bring inflation down and headline numbers, the inflation numbers per se are very, are not very different from what they were in 1980. You have to bear in mind that we've changed the way we calculate inflation but the Bureau of Labor Statistics does provide numbers that essentially backcast current methods to old data. So we have high inflation that is a little bit lower than in 1980 but also the FET's target for inflation is lower. So it looks kind of nasty. What's very different as best we can tell is the state of expectations. Current inflation expectations in 1980, everyone really expected inflation circa 10% to persist indefinitely. You can see that in consumer surveys, you can see that in, there we are, those are the inflation rates and actually can we move on to the next slide then to show you the difference? The, well, maybe not. All right, let me just tell you what the next slide will show that ever appears. There we are. This is survey data. There's a real question, you know, how seriously should we take this but every piece of information I have points to the same story. The last time we had really major inflation, we came in with all significant players, market participants, households, firms expecting that high inflation would persist for the indefinite future. This time around, we have much, much lower expected inflation again by all indications, market surveys. And we have very few, there's a question about how good are the surveys but for what it's worth, they show that people are expecting medium-term inflation on the order of not basically the Fed's target. And we are not hearing, if we look at anecdotal evidence, we're not hearing a lot of cases of firms granting big wage settlements and the expectation that everybody else is going to be granting big wage settlements over the next several years. So we don't appear to have a lot of inflation momentum out there. The question then is, in that case, why is inflation so high? The answer is that although the unemployment rate looks comparable to what it was before the pandemic, every other indicator suggests that the economy is running unsustainably hot. I don't like that. I'd like to see the full employment, but vacancy rates, we can question them, but quit rates are telling the same story. Wage increases are telling the same story. The economy is running unsustainably hot. The good news is that's all because of a hot economy, not because of expected inflation, so that the task of monetary policy in the United States is to cool the economy off before it starts to bleed into expectations. Now, question is, how much cooling do we need? And if, you know, I respect the efforts to estimate USTAR from the beverage curve, I've been doing some very back-of-the-envelope stuff with quits, which is not that different. Wage increases are also suggesting it's possible that under current circumstances we might need to the unemployment rate to rise to 5% to cool the economy off. It's hard for me to believe that USTAR has really permanently jumped that much this quickly, that we might be looking at lingering effects of pandemic disruptions, but nobody knows. And the policy indication for the Fed is pretty simple. Height rates until you see the whites of disinflation's eyes, until you start to see a convincing range of underlying inflation measures falling and a pretty clear sign. It's just, much as I don't like prospective higher unemployment, much as I don't like the whole, you know, and the definite risks of recession, because this is not something that you can fine-tune, I don't think that there's really any alternative to a policy of gradual rate hikes in the months ahead. I'm relatively optimistic that the U.S. will get through this without a severe recession, maybe no recession at all, but it's clearly there's going to be some pain along the way. The European situation, which is what you're mostly interested in, let me just say that it is quite wild. And I have one more slide if we can just get it. I just picked this one up. I stole it from Daily Shock because it's, and I won't vouch for the reliability of the numbers, but surely the general picture is right. Europe is facing a gigantic energy price shock as a result of having become reliant on Russian gas. This is huge. This is far bigger than the oil price shocks of the 1970s. There is very little reason to believe that the European economy is especially overheated. So it doesn't actually, it's not showing, it's not looking like the U.S. in that respect. And so you might say, well, we normally tend to think of that policy should react to evidence of overheating and not to fluctuations in volatile prices. And I wish that I was confident that that was a safe strategy to follow, but when you have a shock this big, in fact, European core inflation has gone up substantially, although that's almost certainly basically energy prices bleeding into other prices as well, rather than a sort of underlying inflation problem. But can we feel secure in the belief that inflation expectations will remain anchored in the face of a shock this large? And the answer, actually we can kill the slide now. The answer is I don't really think I wouldn't, if I were at the ECB, I would not feel comfortable relying upon the shock being transitory. I would probably be tightening. I think there's high risk of a recession in Europe at this point, but it's, now for what it's worth, unfortunately, I mean, U.S. data on inflation expectations are flaky. A lot of it is really just gasoline prices. European data, as best I can make out, are even flakier. If we believe the Bundes box survey inflation expectations of consumers in Germany have gone completely off the rails. I guess I don't really know what to make of that. But the odd thing is that although by normal criteria, the U.S. has a overheating problem that requires rate rises, the European, the Euro area has an energy shock problem that ordinarily would not call for rate rises. The precautionary principle basically says that the ECB has to do some hiking. The moment markets are pricing in equivalent amounts of hiking on both sides of the Atlantic, which is probably excessive in Europe, but it's just a very difficult situation. I've been a big dove. I was wrongly convinced that we were facing mainly a transitory shock. I still think that there was a substantial transitory element to U.S. inflation and there's certainly a large transitory element to European inflation right now. But for the time being, monetary tightening seems to be unavoidable on both sides of the Atlantic and you need to feel your way forward to try to be data dependent as much as possible. If that sounds a little bit less hard-hitting than you'd like to hear, I'm sorry, we really have never seen a shock like this and I think everybody is making it up as they go along. Let me conclude it there. On the situation. Also, I keep on losing sound from the moderator. I just said that Larry's turn is now and I'm sorry for that. Thank you very much. It's a privilege to be here with the ECB, with you, and with Paul. I find myself in agreement with Paul on the difficulty of the situation, on the broad paradigm for thinking about inflation that emphasizes the degree of tightness and the role of expectations and the general view that the appropriate posture forward in the United States and in Europe both involves tightening, albeit for somewhat different reasons, the presence of overheating in the United States and the presence of potentially increasingly unanchored expectations given the magnitude of the energy shock in Europe. I have a perhaps slightly more simplistic and certainly more hawkish view of all of this than Paul has and have had that for quite some time. I reread over the last week Arthur Burns famous 1979 lecture on the anguish of central banking and read relevant histories of the 1970s. And what I was struck by was the pervasive presence of themes we hear today. You have to distinguish in a major way between supply and demand shocks. Recessions are enormously costly and for risk aversion reasons you need to avoid taking chances on the risk of recessions. It is not clear how anchored or unanchored expectations are. Movements need to be made gradually. It I think bears emphasis just how catastrophic that paradigm was around the world and just how high unemployment had to get in the United States and elsewhere with how much pain to control the inflation. And so when I hear arguments about expectations are anchored I think to myself so far and I think to myself that they are anchored is a tribute to 40 years of policy when the kind of approach that emphasized the role of transit so-called transitory inflation and supply side factors was substantially discounted and the mandate was seen crucially as assuring price stability. With respect to the United States I think what was quite plausible was to suppose last year when unemployment insurance had a replacement rate for most workers above 100% that the natural rate of unemployment was substantially displaced upwards for transitory reasons relating to those benefits and to COVID. The fact that we're now a year past all the cash payments, a year past all the elevated unemployment insurance and the beverage curve has not shifted inwards much at all suggests to me that at least as a precautionary assumption we should assume that we are in substantially overheated territory. So my judgment would be that neutral in the United States is involved in unemployment rate given the current structure of the labor market in the general range of 5%. I look at core inflation which was faster this month than last month, faster this quarter than last quarter, faster in the last six months than in the previous six months faster in the last year than in the previous year and ran at 7.2% this month. I look at wage inflation that according to what I regard as the best available data from the Atlanta Fed is surely running above 5% and I cannot understand the view that it is likely to return to a 2% target without unemployment being meaningfully above the natural rate of unemployment. So I think that if we pursue policies in the United States that successfully restore inflation to target it is very likely that we will have a recession that will bring the unemployment rate to 6% or more. That is of course a situation vastly different than the 10.8% that Paul Volcker had to bring about or that we saw during the financial crisis or that we saw in the aftermath of COVID. But the stark fact in the industrial world is that there are almost no examples in which inflation was above 4%, unemployment was below 4% and a recession did not start within the last two, within these subsequent two years and that there are no examples in the United States in which the unemployment rate was driven up by half a percent without being driven up by more than 2%. And so it seems to me that the likelihood is that if we are to bring inflation down in the vicinity of target we will have a meaningful recession. It seems to me that for us to make a decision not to do that because it was too painful would be to invite the end of the bit of good news that Paul is pointing to, the fact that expectations are now substantially lower for three years than for one year and are running substantially below the level of headline inflation. I think that Paul's comments with respect to Europe that highlighted the much greater difficulty of the problem because it was made exogenously or made externally rather than made internally by bad policy. And because of the recessionary consequences of the large terms of trade loss I think all of that is correct. But I also do not see an alternative to a significant increase in rates if expectations are to become anchored or to remain at all anchored. And I think there is the additional factor certainly in the United Kingdom potentially in other parts of Europe of significant fiscal leader responsibility leading to reductions in credibility. I am less convinced of the case for gradualism in central bank adjustments than I think many are. I don't think there is any substantial probability in the United States that this episode can be managed without rates being risen being raised to close to 4%. And in that context it seems to me better to move rapidly than to move slowly. It has seemed self evident to me for some time now that a 75 basis point move in September is appropriate. And if I had to choose between 100 basis point move in September and a 50 basis point move in September I would choose a 100 basis point move so as to reinforce credibility. Seems to me that the move that many regarded as surprisingly large by the ECB recently was also entirely appropriate and I think moving more strongly sooner has benefits in terms of credibility and therefore reducing the ultimate amount of restriction that is necessary that exceed any costs of the possibility that the move will need to be reversed quite quickly. In general I think it is possible but the judgments currently expressed in markets about likely tightening represent something that I would regard as a quite optimistic scenario in both the United States and in Europe not as a best guess. Finally while I am very much aware of the differences between the United States and Europe and the differences within Europe and the differences between the United States and Europe and Japan and other places I am struck by the lack of common international commitment and international signaling in the current moment. It seems to me that for there to be a general recognition of the salience of inflation as a central problem of the challenges that will face the developing world as a consequence of the necessary adjustments in the industrial world of the possible risks not yet realized from excessive exchange rate instability and the sense that there is a collective macroeconomic management on the case globally would reinforce everybody's credibility in a very valuable way. I have been disappointed by the absence of the kind of strong global signaling that has been present at a variety of other very difficult financial moments. Thank you very much. Thank you very much, Larry. That was very clear and you have also already anticipated some of the next questions I was going to go into namely the question of where do we go from here and at what velocity in terms of interest rates. But let me nevertheless dwell on this forward looking short run, short to medium run a bit more. So we all know winter is coming and we don't know how hard or cold it's going to be but I certainly can say that in Europe and especially also in Germany people are buying firewood and it is hard to buy firewood. That price has also gone up, not only the one of gas. Recession is something that is clearly very much on people's minds and fears as is the question of how much energy will be available. So your views on the European economy recently called it an agonizing choice that the Europeans and the European Central Bank is facing here. So the question about how does the economy evolve and what is the appropriate path for interest rate increases and the outlook for them. What is your advice and maybe you can also say something about fiscal policy which clearly also has an impact and is right now also mostly busy with dealing with the energy crisis and shielding households at great expense. So Paul back to you with a bit more detail please on path of the interest rate in Europe. I'm actually having a very hard time just to say in terms of trying to put a number on how much ECB rates need to rise. It's just a very part of the problem is that we have quite weak estimates. They're not great for the U.S. but estimates of the transmission mechanism from interest rates to real activity in Europe are even less secure. But I regretfully agree with Larry that the 75 basis point rise by the ECB was necessary and that there will have to be more. And let me in terms of the policy actually I think we narrow it too much in the European case by talking about fiscal versus monetary policy because there really is now the question of policy to limit energy prices to households and businesses is very much on the table. And in fact it is inevitable. There are going to be price controls and subsidies to limit the cost of energy to the European public over the course of this winter. This is ordinarily economists are very negative on price controls and Larry mentioned Arthur Burns and actually when one talks about Arthur Burns we think about the Nixon price controls and the expansionary monetary policy probably politically motivated that helped to set off the 70s inflation. But this situation is I think a case where things are quite different. It is going to be necessary to limit price rises for households just on sheer equity social cohesion grounds. If current energy prices are fully passed on to households a lot of people will be ruined financially in Europe. And so there's going to have to be a now you could in principle devise a program of financial aid that offsets the price rises sufficiently but in practice trying to devise such a policy is probably beyond what you can do. So there are in fact going to be price controls with substantial subsidies to the energy sector to make them workable. And probably in order also there's going to have to be some kind of rationing instructions to limit maybe even I don't know enough yet to figure out what it's going to look like. And you might say isn't this a recipe for disaster? Didn't we see that happen? Again Arthur Burns and the 70s inflation and the answer will be the reason to think that this time is different infamously sarcastic Reinhardt Roghoff title is that there in the infamous Arthur Burns incident price controls were used to suppress inflation while the central bank was juicing up the economy. In this case it's going to be price controls used to try to hold down inflation while the central bank is tightening sharply which could be a quite different outcome and there is a macroeconomic aspect as well. We don't really know what the mechanism for inflation expectations in Europe is going to be but to the extent that we are fearful that energy prices will lead to a wage price spiral than limiting energy prices even at the cost of substantial fiscal outlays and some rationing may have substantial macroeconomic benefits. So I think if we are trying to think about the European response it's just focusing on the ECB and just focusing on fiscal impulses missing the point. Everything is going to depend a lot on how European nations try to cushion the blow from energy prices. I just want to back up on one point on the extent to which Larry and I are disagreeing. Everything that Larry is pointing to which is that core inflation has stayed high and possibly accelerated is consistent with an economy that is still highly overheated. There's nothing in there that says that expectations are driving this. To the extent that we have a model it is one that says that inflation expectations are the reason why you need to have a period of high excess unemployment. It might be that that model is wrong but what I think I learned, what I got wrong in the inflation debate back at the beginning was that I kind of decided that I knew better than the model and I was wrong. I'd like to know what the story is through which we need a period of sustained high unemployment if expectations have not risen. It's possible it's there but I do think we went in doubt stick to this kind of canonical model which does say that we need a rise in unemployment clearly but probably not a sustained period of excess unemployment. You are mostly interested in the European situation and I think the question for Europe has to be how can you make this winter of discontent with the extremely high energy prices tolerable and that requires that there be a disinflationary monetary policy but it also requires substantial direct action on keeping energy affordable for the general public. Thank you very much Paul. Larry if there is something you want to respond otherwise if you can go to my last question then I will open up to the public in the room. We also have a few board members of the ECB in the room as well as audience I'm sure worldwide. So my last question would be about the long run perspectives on inflation and again your perspectives for the U.S. and Europe if you think they differ you might also want to comment on the strategies the monetary strategies which in your last debate you were back in January discussing in the view of today's situation or of then situation which today looks even more grave. So to you Larry. Let me make a few observations. Paul I think the inflation mechanism involves heavily overlapping wage contracts and the like and I put substantial weight on the fact that job switchers are seeing much larger wage increases than job stares and that gap is larger than it has ever been and that suggests to me that there is a lot of wage momentum that is currently built in and I guess I think of Bob Gordon Phillips curves as being canonical models and people who want to make assumptions different from Bob Gordon Phillips curves probably have the burden of thinking that they're using the different models. We're in agreement on the importance of fiscal as well as monetary policy in Europe I'd offer the general observation that it would be surprising to me if this was a good moment for there to be a significant decline in European real interest rates and without significant increases in nominal interest rates that's likely to be what happens as inflation accelerates I recognize there's a subtlety about which inflation measure goes into the construction of real interest rates. I agree with you Paul on the central importance of fiscal policies that cushion what's happening in energy prices as I heard you though I thought less about Arthur Burns's price controls in the early 70s than Jimmy Carter's energy prices in the late 70s that were motivated almost exactly by the kind of motivations that you described and I think it's fair to say we're generally regarded as disastrous in their effect and I think the idea that if you repress inflation and through rationing then there won't be inflation expectations and that will end up good I think is conceivable and I can construct the argument for it but I think is unlikely these are not entirely new problems it is standard advice in developing countries to protect people rather than to protect prices I do not doubt that it will be necessary for the reasons you describe and given the difficulties in targeting to engage in a certain amount of and perhaps a significant amount of energy subsidy but I think all possible ingenuity should go into finding ways to increase supplies as rapidly as possible even at the cost to other values I think that it is appropriate to engage in significant support policies for households rather than simply trying to maintain prices at current levels through subsidies I think there is some elasticity of demand for energy and that is worth keeping in mind there is a substantial playbook about subsidies versus compensating households from which we can learn I would be the last to take a doctrinaire view of opposition to any kind of substantial subsidy and I share your view about what is necessary I also think that there is a non-trivial chance that Britain has put itself on a catastrophic course with the degree of commitment to subsidizing energy coupled with the utter absence of any signs of commitment to fiscal responsibility and I would hope we could agree that that was not a model for Europe so I share your view but I think it is appropriate for central banks who have a long history of commentary on the desirability of structural reform to try to orient energy policies in as sound a way as is possible given the need to maintain a sense of national cohesion two other points very quickly one is I hope it is entirely clear that the goal of everything Paul and I are discussing and debating is to maximize living standards employment, comfort, good lives for people across all of our economies that inflation control is not an end of itself it is a means to that end and that those who advocate more vigorous approaches to inflation control do not do it because we think austerity is a good thing but we think that by acting more promptly we will minimize the total burden and sacrifice that will be felt over time my best guest speakers would be that while I do not think it is the right thing to plan for right now average inflation rates will be somewhat higher over the next decade than they were over the last decade I think a central question for monetary policy will be where neutral rates go back to as things normalize after the pandemic and I am agnostic as between the view that the forces of secular stagnation will reassert themselves and the view that the massive increases in government debt that we have seen and the substantial investments directed at the green economy will raise neutral rates I believe that we all should learn a lesson of humility from the events of the last five years and I am increasingly skeptical of the merits of forward guidance as a policy my fear is that markets do not much pay attention and believe the forward guidance and so it does not heavily influence the posture of medium or long-term rates but institutions pay attention to their past forward guidance and so feel constrained from doing what would otherwise be the right thing down the road and therefore you get the worst of all worlds and I would as a general doctrine favor returning to the extent that it is possible to a more Delphi oracle approach to monetary policy communication and a less forecast every moment to describe every reaction function kind of approach Thank you very much Larry Paul very quickly because I really do want to open up your expectation for longer-run inflation rates in US and Europe do you want to give a number, your number? I actually do believe that we're going back to 2% and this is an interesting thing where oddly I may be more hawkish than some of the other people who have been much more hawkish than I have there is a view Jason Furriman has expressed that maybe as we get inflation down we should sort of when we hit 3% 2% is a very arbitrary target maybe at 3% we should declare victory and pull out but that only makes sense if you think that we're engaged in a vulgar style disinflation in which case there's a point at which you sort of need to how much more do you not want to squeeze it if you believe as I do that what we have now is essentially 2% expected inflation plus an overheated economy and you need to remove the overheating then you basically go back to where you were before there's enough wiggle room in there that may be a bit higher but I see nothing in the current situation that would lead me to expect that long-run inflation will be significantly above target now over the past decade on an average was below target but I don't think that we're really I don't see any reason to think that inflation is going to be persistently higher I think the world in 2025 is going to look an awful lot like the world in 2019 That's good news can I now ask our audience if they would like to ask any questions I see Isabel raising her hand microphone is coming your way Can you hear me? Thank you very much to Paul and Larry for their interesting contribution so monetary policy is facing a communication problem which stems from the fact that monetary policy affects economic activity and inflation only with a lag and this becomes a real problem I think for us going forward because as Paul rightly said we are entering a difficult winter and I think there is a need for a tightening of monetary policy but of course what we are doing now is not going to affect inflation during that winter partly because monetary policy only works with a lag but also because certain parts certain components of inflation cannot even be affected so we have a very little impact on energy prices so how can we deal with this communication problem that we tighten some people may not like that I mean people on let's say that have loans on variable rates that will actually be quite unhappy possibly we enter a recession and inflation nevertheless stays high over the shorter term I think the question goes to both of you can I say it's actually even worse than that because monetary policy operates with both a lag and a lead that is central banks control very short term interest rates which have very little relevance to the real economy and what matters for the real economy are longer term rates which reflect expected monetary policy that's why even before the recent ECB hike long term rates in Europe had risen by almost exactly the same amount as they had in the United States even though the Fed had moved sooner and more aggressively markets had already priced in comparable tightening on the part of the ECB and look it's a very difficult problem even leaving aside the lead issue in the furnace situation a little bit of the thermostat that responds to the temperature of the room 20 minutes ago and that's a very it's a very difficult problem to solve normally what you want to do is have a pretty good model of what the furnace is going to do to the heat in the room unfortunately a two app metaphor I'm afraid for Europe right now but we have very little sense of the models I think this is in the end why I am for more gradualism than Larry is simply because we are so uncertain about how things work and the chance of overreacting badly is there now of course if you the chance of underreacting is there as well but you know we're going to get it wrong and it's clear the odds that we're either going to have high inflation persisting longer than people wanted or if I had to make a guess the odds that both the ECB and the Fed will turn out to have overshot is pretty high but you do the best you can and there is no good answer thank you Fabio Larry you want to go at this one yeah I mean I think I use the analogy of taking a shower in an old hotel where the water temperature changes with a 20 second lag from the time you turn the faucet and it's very hard to avoid scalding yourself for freezing yourself I can't resist saying with respect to the United States this is why it seems to me that the errors made during 2021 were so egregious that precisely because of the magnitude of the lags allowing yourself to fall behind the curve was a mistake and I would have to record the judgment that the least responsible central banking statement of the last decade was the 2020 Fed framework that explicitly disavowed the possibility of tightening until both they had seen substantial inflation rather than expecting it and until they were convinced that they were at full employment which seemed to me to be a doctor and that didn't make any sense at all in a world where there are the substantial lags that you described but I agree on the difficulty of the problem on the question of gradualism my reaction is that that's right but if there's a place you know you're going to go I don't see the great advantage of getting there with a little bit more gradualism if for example you know or you're 98% certain that you're going to raise rates by 100 basis points doing it over six months seems to me to have no advantage of doing it relative to doing it over two months if it is beneficial you will start to get the benefits sooner given the lags if you do it over two months and if it turns out to be a mistake you can start correcting it that much more quickly so I agree but I think the principle basis for gradualism is that you preserve the right to maintain optionality about not doing things about not taking further steps and I agree there but where it's essentially inevitable that the step will be taken I think that less gradualism than we've customarily thought in terms of would be desirable okay great thank you Larry now the question the next one or comment is Fabio Panetta first of all I want to thank both panelists for their comments which are absolutely interesting and stimulating I would like to go back to this issue of gradualism versus a more aggressive policy trying to refer it more specifically to the situation of the Euro area as you both mentioned wages in the Euro area at least for the time being are growing at a moderate pace while inflation expectations remain in line with our target they are by and large in a narrow range around 2% of course either condition could change very rapidly as it was mentioned in the discussion and especially if inflation above target inflation persists for long time in this case if wage growth becomes much more rapid or if expectations de-anchored the monetary policy strategy would be very clear but let's assume that this does not happen wage growth remains moderate and expectations do not de-anchor in this case taking into account the fact that in the Euro area the output gap has not been closed our projections would suggest that we will close the output gap many quarters from now and taking into account that the main determinant the dominant determinant of the inflation spike we are seeing is a sequence of supply shocks would you still advocate for an aggressive adjustment of monetary conditions or take into account the specific conditions of the Euro area would you not suggest that a more gradual adjustment being ready to fine tune in case something happens in terms of second round effects might be preferable thank you very much I think this question is mostly to Larry who was advocating the faster right? I think if you assume that even given the current structure of the economy you are well short of potential you assume there are no important credibility issues you assume that things are completely anchored in terms of expectations then surely all your premises then surely your conclusion follows but I think it is a matter of judgment whether that is the case I don't mean to be saying that policy should be a random walk if you think there are 150 basis points off you should move 150 basis points this is obviously a matter of balance but as I look at the history of monetary the history of monetary policy I can think of a fairly wide variety of occasions on which policy moved to gradually it's pretty clear that that happened during the 1970s it happened excessively gradually with respect to the gathering financial storm in Europe after the financial crisis it happened in the United States during the Vietnam war I could proliferate a wide variety of examples when with the benefit of hindsight it seems to us that policy has been too gradual and I find it more difficult to enunciate examples in which in retrospect policy moved too sharply and had excessive consequences and that's why and it's a natural tendency of human beings facing difficult decisions to model a bit and choose incremental measures that try to split the difference that's what brought us the Afghanistan and Vietnam wars and so when I speak up in general with a bit of skepticism about gradualism particularly at a moment when credibility is in question that's right but I guess I'd be interested in Paul's view I think I have a variety of examples in which with the benefit of hindsight policy was clearly too gradual and I guess I would be looking for the famous examples of financial policy that was too precipitous and if they're in equipoise then I guess we're getting it about right but if they're not in equipoise that would seem to me to constitute an argument that's gradualism Larry and Paul I really wish you were here because obviously this is something that we should be keeping discussing for a long time and there is a lot of interest in the room I see people that would love to continue the discussion but unfortunately we're running out of time we have run out of time Paul can I give you one minute to reply to everything please there are two famous examples of a central bank overreacting to an energy price shock and possibly doing substantial damage and they both involved the ECB both on the eve of the global financial crisis and then on the eve of the euro crisis now they were relatively small moves but they do if you want examples of central bank that is reacting too fast I would also say that not to reverse Margaret Thatcher not all surprises are negative just in the last few days we're seeing some remarkable drops in European energy prices which still remain extremely high but it may be that the European situation is not going to be quite as dire as we think so I think that's about, we could go on for another five or six hours on this probably but that's where I would put it Thank you so much to both of you thank you from Frankfurt and thank you Paul for finishing it on a bit of an optimistic note it is worth saying that sitting here in the northern European plain where there is flat from Paris to Moscow it does feel like we are close to a big crisis and to a battlefield and probably in the US it is a bit more remote but thank you very much for engaging with the European situation as well as with the US thanks for being with us here to this evening or in your morning and see you again online or in person even preferably the second bye bye