Christine Lagarde: Welcome address - ECB conference on monetary
policy
Welcome address by Ms Christine Lagarde, President of the European Central Bank, at
the European Central Bank Conference on Monetary Policy: bridging science and
practice, Frankfurt am Main, 4 October 2023.
* * *
It is my pleasure to welcome you all to the 2023 ECB Conference on Monetary Policy.
The last few years have been an incredibly challenging time for monetary policymakers
around the world.
We have faced a succession of overlapping supply and demand shocks that have
created a complex and fast-changing macroeconomic landscape.
And as a result, we have seen a paradigm shift in monetary policymaking.
Where central banks in advanced economies once wrestled with overcoming the lower
bound on interest rates, they have more recently been engaging in the fastest hiking
cycle on record.
But policymaking, by nature, operates in real time. We make decisions based on the
best analysis and data at hand. However, it is exactly when rapid shifts in the
macroeconomic environment occur that prior, unforeseen knowledge gaps are suddenly
exposed.
This is why policymakers - who are practitioners at heart - can benefit greatly from
cutting-edge research. Fresh insights and innovative approaches can go a long way in
closing those knowledge gaps, helping policymakers to navigate this new terrain more
effectively.
That is why this conference is called "bridging science and practice" - because the
issues we are discussing are truly those that are informing our policymaking.
Today's event captures four such topics.
The first topic is how the transition from the low inflation regime, which prevailed before
the pandemic, to the high inflation rates we are seeing today affected the pass-through
of shocks.
The papers to be presented over the next two days provide important contributions to
that important debate.
In particular, we will see evidence that the propagation of adverse supply shocks is
nonlinear: when inflation is high, the propagation is stronger. And we will see how firms'
pricing strategies can become state-dependent and make prices more flexible in
response to large shocks.
The second topic on which the conference focuses follows naturally from the first.
With such a rapid shift in the inflation outlook, there has been an equally rapid shift in
the stance of monetary policy. And this has raised questions about how best to calibrate
policy when accommodation must be quickly withdrawn after a long phase of loosening.
We will see research that highlights some of the challenges that can arise. For
example, we will hear about the challenges for financial stability and how unwinding
unconventional measures can affect the control of short-term interest rates - a theme
that is relevant for the ongoing review of the ECB's operational framework.
This rapid shift in the policy stance is also providing us with new insights into the third
topic covered by the conference: the transmission of monetary policy.
There has been much debate in recent years about the strength and speed of monetary
transmission and how the relative importance of different channels has changed over
time. And this has injected considerable uncertainty into the current tightening cycle.
But research is now starting to come in that gives us a clearer picture.
We will hear about how the heterogeneous structure of the housing market in the euro
area can lead to the asymmetric transmission of policy across countries. And we will
see how models which account for the uneven exposure of households to policy
changes can explain some of the features of transmission that we see today.
The fourth topic is the interaction between different policies.
One of the defining features of the response to the pandemic was the alignment
between monetary and fiscal policies, which yielded an unexpectedly strong recovery.
And that strong recovery - and the resulting rise in inflation - has been accompanied by
global monetary policy tightening, unprecedented in its synchronisation.
We will see the implications of these policy interactions addressed in the presentations
over the coming days. And let me also add: for the first time since we have been
holding this conference, some of the contributions will come from the three young
economists we have selected, who will have a dedicated session tomorrow.
Finally, we are privileged to have keynote speeches from two Nobel laureates - both of
which are highly relevant for the challenges that policymakers are tackling today.
Douglas Diamond will talk to us about interest rate risk, financial crises and bank
supervision - a relationship that policymakers everywhere have become more alert to in
light of the recent episodes of banking turmoil in the United States and Switzerland.
And Peter Diamond will discuss the labour market and monetary policy, which is
perhaps the greatest puzzle facing monetary policymakers across advanced economies
today.
It is through path-breaking research, such as the findings we will hear at this
conference, that policymakers' knowledge can grow. But of course, we do not yet have
all the answers - not least because of the heightened uncertainty we face.
For this reason, the ECB has set up its policy framework to be robust to the complexity
and uncertainty of this landscape. Specifically, we have made our future decisions
contingent on three criteria: the inflation outlook, the dynamics of underlying inflation
and the strength of monetary policy transmission.
This framework has helped us chart a tightening path that began steeply and then
slowed to a more normal pace. Now, based on our current assessment, we consider
that the key ECB interest rates have reached levels that, maintained for a sufficiently
long duration, will make a substantial contribution to the timely return of inflation to our
medium-term target.
Our future decisions will continue to be based on these three criteria and they will
ensure that the interest rates will be set at sufficiently restrictive levels for as long as
necessary.
I wish you a fascinating and productive conference.