Keynote address by François Villeroy de Galhau,
Gouverneur de la Banque de France,
Official Monetary and Financial Institutions Forum
webinar, 25 September 2020
i
« ROLE OF CENTRAL BANKS IN THE HEART OF THE ECOSYSTEM »
Contact presse : Mark Deen (mark.deen@banque-france.fr), Déborah Guedj
(deborah.guedj@banque-france.fr)
Good morning and welcome to this webinar, jointly organized by the Official
Monetary and Financial Institutions Forum and the Banque de France. What
better way to demonstrate the digital transformation than holding an event in
cyberspace. It has been common in recent years to hear about disruptive
technologies but over the past 6 months, information technology has instead
been a crucial source of continuity in a highly disrupted world.
Digitalization is one among many factors transforming central banking and this
will be my broader theme this morning. The ECB Strategic Review rightly
launched by Christine Lagarde, with an explicit list of challengesii, is the
opportunity to reflect on how the Eurosystem should respond to them.
The shocks that have hit the economy in the past decade have been
unprecedented, but in hindsight, many long-term structural shifts were occurring
that have caused the unstable and complex situation we face today. Global
natural interest rates had already been falling since the early 1980s driven by
the demographic transition and risk-aversion in key emerging markets.
Digitalisation and globalisation, combined, have been pressing for "lowflation".
Financial vulnerabilities were also steadily, but invisibly, rising since the so-
called Great Moderation. Indeed, it seems that excess demand now shows up
in asset prices before wages or inflation, complicating the trade-offs between
price stability and financial stability.
However, it would be remiss of me not to briefly mention the short-term
challenges that we currently face.
Confronting this unprecedented Covid crisis, we acted boldly and rapidly, using
all the tools at our disposal and inventing new ones such as the PEPP. By doing
so, we successfully avoided both fragmentation and deflation. That said,
inflation is not yet where we would like it to be, back towards 2% over the
medium term. Have no doubt about our determination to act as much as needed,
and about our capacity to act. Again this Autumn, we are hearing chatter about
the ECB running out of ammunition. It proved completely wrong in March, and
it remains wrong today. If needed, the ECB has ample room for manoeuvre. By
the way, the yesterday's take up (EUR 174 bn) of our TLTRO-3 confirms the
attractiveness and the adequacy of this innovative tool. We decided to keep a
steady hand in the last Governing Council due to the continuity of our economic
forecasts. But steady hands are not tied hands: we have free hands for the
future.
**
Let me now come to the ECB's strategic review, on which work has restarted
after the peak of the Covid crisis. It is more extensive than the FOMC's as it will
cover, among many things, structural change; climate change; financial stability;
and the effects of digitalization. The Eurosystem will take its time, as the Fed
did, to consider the different alternatives. What professional economists find
theoretically appealing may not be either easily applicable or comprehensible to
the general public. What financial markets expect in the short run is not always
consistent with long-term economic objectives.
But let me try today to share some preliminary thoughts on four key questions:
1. Is there such a difference between a dual mandate and the ECB's two-
tiered mandate?
2. How could we clarify the inflation objective?
3. What about the "second pillar" of the ECB and is there a link with the so-
called "secondary" objectives?
4. Last but not least, how can we improve communication with the general
public and economic actors?
My aim obviously is not to give you conclusive answers to these four questions
but to highlight important elements of the debate. The Fed's conclusions are a
significant part of it but one shouldn't assume that the ECB will simply follow
suit. Other contributions - such as the ECB Listens exercise, our academic
roundtables, Sintra or the current review of the Bank of Canada - are also
important and differences are not always where expected.
1. Is there such a difference in mandates?
For most observers, including politicians, this is the most striking issue: the Fed
has a dual mandate, including price stability and maximum employment, and
the strategy review shifted its emphasis to the latter. The ECB, meanwhile, has
a primary objective of price stability, according to the Treaties.
Of course it is our duty to stick to the Treaties and our strategic review won't
deviate an inch from them. However let me only remind you that our legal
mandate is not, as often assumed, a purely "single mandate": it is rather a two-
tiered one that includes at least two other objectives without prejudice to price
stability: "to support the general economic policies in the Union" contributing
among other aims to a "social market economy, aiming at full employment and
social progress"iii; and "the stability of the financial system"iv
Furthermore, I would argue that there is less of a difference between a dual
mandate and flexible inflation targeting than people think: noticeably, the
measures we have taken to offset the effects of negative shocks such as the
Global Financial Crisis or the sanitary crisis have a direct effect on growth and
employment. As far as demand shocks are concerned, the monetary policy
prescriptions are the same. In principle there are conflicts when there are supply
shock but inflation targeting central banks also tend not to react to temporary
supply shocks but respond only if there are signs of second-round effects.
The ECB also takes note of estimates of the natural rate of unemployment but
recognizes that these are subject to enormous uncertainty - like estimates of all
other "natural" variables. The ECB would not tighten policy based solely on an
estimated unemployment gap.
2. How could we clarify the price stability objective?
The main substantive change by the FOMC is the introduction of an inflation
make-up strategy. Rather than being solely forward-looking, the FOMC will, or
could, now correct for past inflation shortfalls. Let us here also discuss the areas
of continuity as Jay Powell did in his speech of 27 Augustv - and the possible
differences:
 The Fed confirmed our common strategy of inflation targeting and it has
kept 2% as its numerical goal. This "conceptual convergence" remains a
cornerstone of modern central banking.
 Average inflation targeting is a flexible tactic, possibly temporary, within a
wider strategy of keeping inflation sustainably where expected. Still more
importantly in my view, the inflation target should be perceived as
flexible, symmetric and medium term. Allow me to be a bit more
specific about these three requirements.
flexible is the most obvious one. We cannot guarantee to achieve
o
precisely our numerical objective either all the time or straight away.
Symmetric means that our numerical objective is a target and not
o
a ceiling. As a consequence we might be ready to accept inflation
higher than 2% for some time, without mechanically triggering a
tightening of our monetary stance. Commentators sometimes
attribute a perceived asymmetry to our current definition of price
stability "below, but close to, 2%". The Governing Council has
frequently re-affirmed its commitment to symmetry - as it stands in
our Introductory Statement since Mario Draghi. Nevertheless, we
should examine whether the current formulation casts doubt on
this.
medium term means that we should judge our inflation
o
performance over a long enough period. We shouldn't forget what
Jean-Claude Trichet often stressed as an optimal performance in
the first years of the euro. "Over these 12 years, the average annual
inflation rate in the euro area has been 1.97%. We have achieved
price stability in the euro area over what has already been quite a
long horizon."vi As I said in previous occasionsvii, our medium-term
target needs to be viewed in two ways: it has to be forward looking
to guide inflation expectations, but it cannot ignore the past either.
All this is not explicit average inflation targeting ex ante, but would
achieve very similar outcomes ex post. We will have to discuss that.
 We will also have to discuss the precise formulation of our inflation
objective, in at least two respects: the "below but close to" as already
mentioned and the measure of inflation we use. Continuity is a positive
asset but the inclusion of "owner-occupied housing" in the HICP is
frequently, and somewhat rightly, suggested by the general public. As you
are aware, the preferred inflation measure of the Fed, the PCE index,
includes these expenditures.
 Last but not least, our inflation objective while clarified should also be
credible. I will come back to this with my fourth question about
communication.
3. What about the second pillar of the ECB and is there a link with
"secondary objectives"?
For many, the history of the second pillar of monetary analysis of the ECB seems
to be coming to an end. Born as the first pillar in 1999 and coming at the time
from the strict following of monetary aggregates by the Bundesbank - and the
Banque de France as well -, it became the second pillar after 2003, passing
behind the economic analysis of the inflation outlook. And due to the fact that it
has progressively fallen into disuse, many suggest we should now call time on
it during our strategic review.
Is it that sure? Isn't there another alternative path, more adequate than letting it
disappear? There are three possible reasons:
 The second pillar allows a cross check on the analysis of inflation.
 We could possibly introduce a focus on nominal aggregates, whereas
the first pillar focuses by its nature on prices and volumes.
 Finally, it would allow reference to some of the "secondary" objectives of
the ECB, including financial stability.
In our discussion to come, I believe we could study two types of aggregates:
 Financial aggregates, from the perspective of financial stability, and
potentially looking more closely at the assets of financial institutions
including non-banks (such as their provision of credit in the broadest
sense) rather than at their liabilities only (including money, as in the past).
 Other economic aggregates, starting with nominal GDP, which has the
virtue of combining real growth and prices - two variables that statisticians
sometimes have difficulties separating in our measures. But also
employment and income distribution, which respond to the demands of
the Treaties as well as to the expectations of the public.
Allow me some remarks on the substance of these "secondary" objectives. To
achieve financial stability, in an ideal world, we would have a box of
macroprudential tools that could maintain financial stability whatever the
monetary policy stance. However, in practice our set of macroprudential tools is
comparatively limited. We need a monetary policy strategy that reflects this
reality. We should go beyond the old debate of "separation principle" versus "
leaning against the wind". I advocate a median way, which we could call
"coordinated" or "integrated".viii We have now a range of unconventional
monetary instruments and our objective should be to pick the right combination
that delivers the necessary accommodative monetary stance while minimizing
of adverse side-effects on financial stability. TLTRO's and the tiering system we
use today for refinancing the Eurozone banks are two good examples in this
respect.
On climate change, the emphasis put by Christine Lagardeix herself is welcome
and totally warranted. In my view, the fight against global warming is already an
imperative for us under our price stability mandate: not only will the effects of
climate change have significant repercussions on future inflation and growth,
but they are already having an impact now. We could implement our climate
decisions in no more than 3 to 5 years, which would make us pioneers among
major Central banks.
4. How to improve communication with the general public?
My final remarks concern communication. Central banks have come a long way
in being transparent about their decisions and explaining their reasoning.
However, our communication is too often addressed to a narrow group of people
- the media, the markets and economists. We need to do a better job of reaching
the general public. And this means two changes of paradigm:
 it is not only a question of democratic accountability - however essential
this remains -, it is also key for our economic efficiency. Better-informed
firms and households will also make better decisions and ones more
aligned with our strategy, I will come back to it.
 Secondly, we should evolve from a narrow objective of "transparency" to
a wider objective of "clarity". This means focusing on what is heard
rather than what is said: we cannot merely "publish and go". As Tiff
Macklem, my Canadian colleague, says "Public communications should
be in plain language and free of jargon. We should speak as public
servants and peers, not as oracles delivering messages from an ivory
tower."x And effective speaking also requires active listening. At the start
of next year, consistent with the ECB endeavours, we will host a number
of "Banque de France listens" events in all regions to hear what French
citizens and SMEs think about inflation and monetary policy. We will then
adjust our communication depending on what we hear.
Let me elaborate on the economic stakes of this communication. Our inflation
targeting policy will be significantly more efficient if economic agents, be they
households or businesses, do actually understand it, accept it and believe it.
Hence it should be seen as clear, legitimate and credible. I insisted earlier on
clarification (question 2), let me now conclude with legitimacy and credibility.
One of the most difficult challenges for a central bank with a price stability
mandate is how to explain a positive inflation objective. The general public often
does not understand why a central bank would deliberately try to increase
inflation. We need to explain better that although our price stability objective is
defined in terms of HICP inflation, we are actually seeking a general average
increase in all nominal variables, including wages and nominal GDP. Few
people spontaneously want an increase in consumer prices, but most do want
an increase in their nominal incomes. Furthermore, households, firms, financial
institutions and governments enter nominal contracts (negotiate wages, take out
mortgages, buy sovereign debt etc) based on expected inflation. If actual
inflation is higher or lower than these expectations, then wealth and income are
transferred from one group to the other. The best way to be neutral is to
announce a target that can efficiently guide expectations.
To a non-economist, price stability would imply targeting zero inflation. However,
we need to explain why targeting zero inflation is not ideal. Real wage
adjustments can be necessary to maintain competitiveness and sustain
employment and this real adjustment is easier to achieve with a positive inflation
rate. This is still more important in a monetary union in which real adjustments
are necessary to maintain internal balance. The effective lower bound (ELB) on
nominal interest rates would also be reached more frequently, putting a
constraint on the use of monetary policy. But I do acknowledge that using the
ELB argument at, say a family lunch on Sunday, is easier said than done.
Last but not least, credibility. Here, households and firms have mixed feelings:
they believe that actual inflation is much higher than central banks and statistics
institutes claim; and they doubt we will deliver the "close to 2%"in the future.
Distrust is too often the name of the game. Here, let us again listen and speak.
First listen to the inflation expectations of households and firms: we don't
measure them properly today, although they are of the essence for economic
transmission of monetary policy, as households and firms are the actual price-
and wage-setters. Indeed, their price expectations are quite different from those
of financial markets we tend to focus on.
Listen and then speak: once a central bank has committed to a target, it must
use every tool available to deliver on it and explain clearly that the transmission
of the monetary impulse to the economy entails some delays. We are all
convinced that a credible inflation objective makes stabilizing inflation easier
because the objective anchors inflation expectations. Let us convince our fellow
citizens of our determination, "in plain language" - I hope my remarks today help
somewhat to initiate this essential debate we will have to conduct and conclude
in our ECB strategy review.
Thank you for your attention.
Références
iI would particularly like to thank Nathalie Aufauvre, Matthieu Bussière, Olivier Garnier, Ivan Odonnat and Adrian
Penalver for their help in preparing this speech.
ii
https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200123~3b8d9fc08d.en.html
https://www.ecb.europa.eu/press/inter/date/2020/html/ecb.in200124_1~a226a06d7a.en.html
iii
Article 3.3 of the Treaty on the European Union.
iv
Article 127.5 of the Treaty on the Functioning of the European Union.
v
https://www.federalreserve.gov/newsevents/speech/powell20200827a.htm
vi
at the Evangelische Akademie Tutzing, Bavaria, 13 November 2010.
vii
https://www.banque-france.fr/sites/default/files/medias/documents/2020.05.25_sep_en_cl.pdf
viii
https://www.banque-france.fr/sites/default/files/medias/documents/bdf-pse_2019_09_20_vf_cl.pdf
ix
https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200227_1~5eac0ce39a.en.html
x
https://www.bankofcanada.ca/2020/08/imperative-for-public-engagement/