Jean-Claude Trichet: The role of research in central banks and at the ECB
Speech by Mr Jean-Claude Trichet, President of the European Central Bank, at the ceremony for the
Award of the Germán Bernácer Prize, Madrid, 21 May 2007.
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Ladies and Gentlemen,
It is a privilege and a pleasure for me to award today the 2006 Germán Bernácer Prize to Hélène Rey,
Professor of Economics and International Affairs at Princeton University, for her outstanding research
on financial globalization, exchange rates and capital markets.
I am particularly pleased to be here for two reasons: The 2006 Bernácer Prize Selection Committee is
composed of eminent economists that have global reputation and was chaired by Lucas Papademos,
Vice-President of the European Central Bank; and I had myself the honour of being in touch with
Professor Rey as soon as 1998 when she led a research granted from the "Fondation Banque de
France"
I like to think that the Eurosystem has to some extent contributed to the brilliant career of Professor
Rey and to her challenging research agenda. First in 1998 and then in 2003 and 2004, she received
grants from the "Fondation Banque de France". More recently, in 2005, she was granted a Lamfalussy
fellowship by the Research Network on Capital Markets and Financial Integration in Europe, which is
jointly managed by the European Central Bank and the Center for Financial Studies at the Goethe
University of Frankfurt.
Financial support for young and bright European economists is one among several ways in which the
ECB and the national central banks of the euro area contribute to the enhancement of research in
monetary and financial economics. This leads me to a few remarks on the role of and scope for
research at the ECB and more generally in central banks.
The main goal of economic research at the ECB is to provide a strong conceptual and empirical basis
for policy-making. More specifically, very important aims are to increase knowledge of the functioning
of the euro area economy and to provide high-quality models, tools and analyses that are relevant for
the conduct of monetary policy and the fulfilment of the other tasks and functions of the ECB.
The general purpose and specific objectives of research in central banks are seldom questioned. A
debated issue, however, is whether central banks should be producers or simply consumers of
research. Should central banks allocate resources to costly in-house research, rather than buying
research output from universities and other research institutions? There are at least four reasons why
the ECB - like many other central banks - has decided to develop its own research capability from its
start.
First, central banks need research-oriented economists to follow the latest developments in economics
and to recognise their potential relevance for policy-making. Let me provide an example based on the
sustainability of a country's external imbalance - a topic that greatly benefited from the work of
Professor Rey. The literature has recently pointed to the limits of traditional approaches to the balance
of payments, where currency depreciation provides the bulk of the adjustment needed to correct a
country's current account deficit. Traditional approaches fail to realize the consequences of financial
globalization for the sustainability and adjustment of the external position. In the presence of variation
in asset returns, cross-border asset holdings introduce valuation effects that decouple the dynamics of
net foreign assets from that of current accounts, altering the role of the trade balance in correcting a
country's external position. Recent research at the ECB has been very enlightening in this respect.
A second reason for conducting research in a central bank is that a major task of central bank
research is to bridge the possible gap between academics and policy makers and to create occasions
for interactions with the academic community where the diversity of views can be expressed and
discussed. For instance, at the ECB we are convinced that a thorough analysis of monetary
developments - our "monetary pillar" - is important for the conduct of monetary policy and for the
anchoring of inflation expectations. Our view is supported by the strong empirical link between money
growth and inflation over the long-run and by theoretical considerations relating to the ability of
monetary and credit aggregates to point at imbalances in the financial system and inflationary risks.
Looking at the historical experience, the analysis of monetary developments has helped the ECB to
assess the risks to price stability, to identify the nature of the shocks impacting on the euro area and to
signal its medium-term orientation. This has been a key factor in anchoring agents' expectations and
in establishing the high credibility of the ECB. To broaden and deepen the monetary analysis we trust
that it is important for us to have an ongoing, direct and candid openness to discussion with the
academic world. An example is provided by the 4th ECB Central Banking Conference on "The role of
Money and Monetary Policy in the Twenty-first Century", where the ECB engaged in an open debate
with academics on this important topic.
A third argument to invest in central banks' research is that competition with the academic world
ensures adequate monitoring of the quality of models and analytical tools used for policy. For instance,
the New Area-Wide Model is a structural macroeconomic model for the euro area that has been
developed by staff in DG Research for simulation tasks and scenario analysis. The model is also
regularly used to produce research papers that are widely presented in academic conferences and
central banks workshops. This provides a quality check and guarantees that a model used for policy
analysis is kept up to the highest standards.
Finally, a fourth reason for investing resources in research is that the policy process sometimes
requires research output not yet available at universities or other research institutes. The ECB has at
times identified issues of fundamental importance for understanding the impact of monetary policy in
the euro area, upon which limited information was available. As a consequence, the ECB has decided
to lead and co-ordinate research efforts through Eurosystem networks, which involved the ECB and
the national central banks of the euro area. The Monetary Transmission Network pursued for three
years empirical analyses of the transmission of monetary policy in the newly formed euro area.
Macroeconomic time series data were used to estimate a variety of econometric models of the
transmission at euro area and national level, while microeconomic data were used to measure the
effects of monetary policy on investment of non-financial firms and on the lending behaviour of
commercial banks. The Inflation Persistence Network worked for two years at understanding the
patterns and determinants of inflation persistence. The network availed itself of an unprecedented
data set. The individual price records underlying the construction of both consumer and producer price
indices was made available in a large number of euro area countries. Moreover, the network
conducted surveys on price setting behaviour in nine countries of the euro area. These databases
enabled to understand the behaviour of price setters, to investigate the determinants of nominal
rigidities and to empirically test alternative price setting models for the euro area. Finally, the ongoing
Wage Dynamics Network aims at identifying the sources and features of wage and labour cost
dynamics that are most relevant for monetary policy. It aims at clarifying the relationship between
wages, labour costs and prices both at the firm and macro-economic level.
The ECB trusts that research is enhanced by exposure to external ideas and latest advances in the
field. This exposure is mainly achieved through regular seminars and conferences. On top of internal
seminars given by staff, the ECB weekly organizes an Invited Speaker Seminar and, jointly with the
Center for Financial Studies and the Deutsche Bundesbank, a Joint Lunch Seminar. It also organizes
a number of conferences and workshops. In 2006, the ECB co-organized fourteen conferences on a
broad range of topics, such as the theory and practice of monetary policy, wage and labour costs,
financial integration and stability, financial systems and economic growth, payment and settlement
issues, financial globalization and integration, financial statistics, and national accounts. Of course, a
special interest is devoted to monetary policy issues. Together with the US Federal Reserve Board,
the Center for German and European Studies at Georgetown University, and the Center for Financial
Studies at the Goethe University, the ECB sponsors an "International Research Forum on Monetary
Policy". The purpose is to encourage research on monetary policy issues that are relevant from a
global perspective by organizing conferences that are held alternately in the Euro Area and the United
States. Another important way to achieve external exposure is through visitors and consultants. Since
2006, the ECB awards one Wim Duisemberg Fellowship per year to internationally renowned experts
who are selected to visit the bank. The aim is to promote policy-relevant research that meets the
highest academic standards. A number of consultants are also invited to visit the bank and to provide
their expertise on major projects or research activities.
Research at the ECB has an important external impact through a number of channels, namely
presentation of research economists at workshops and international conferences, dissemination of the
networks' research findings, development of new data sets, models and methodologies, and
publication of ECB research papers. One prominent way to disseminate research is through the
Working Paper Series. In 2006, the Series released 137 Working Papers, with 90 papers authored or
co-authored by ECB staff. These numbers stand high when compared with other institutions (such as
the Federal Reserve Board) that are similar in terms of staff and tasks.
Of course, the fact that the ECB conducts its own research does not mean that it does not support -
and consume the results of - research conducted outside the bank. For example, the ECB currently
contributes to two research networks involving research institutes outside the Eurosystem. I have
already mentioned the network on Capital Markets and Financial Integration in Europe, which was
launched by the ECB and the Center for Financial Studies to stimulate research on financial
integration and financial system structures in Europe, and on the linkages between Europe, the United
States and Japan. The second is the Euro Area Business Cycle Network, involving the ECB, the
national central banks of the euro area, the Bank of England and the Centre for Economic Policy
Research. Its purpose is to achieve a better understanding of the euro area business cycle by
fostering empirical analyses on this issue. The ECB is also a contributor to the Centre for Economic
Policy Research and a number of other research activities carried outside the bank.
To conclude, I strongly believe that central banks need top-quality research on monetary and financial
economics. Although general research of an academic nature might be better-suited for universities
and research institutes, there is still scope for central bank economists to conduct research that is
relevant for the conduct of monetary policy and for the other functions and tasks of a central bank.
I thank you for your attention.