samchain/econo-pairs-v1 huggingface dataset:
Columbia University, New York, 11 October 2022 « What monetary policy narrative after Forward Guidance? »  Speech by François Villeroy de Galhau, Governor of the Banque de France  Page 2 sur 14  Ladies and gentlemen, dear students and professors, I am very grateful to Dr. Patricia Mosser for the invitation to speak at Columbia University. I already had the honour of delivering a speech here in April 2017, and it is great to be back. The current context is obviously quite different from five years ago: today we face too high inflation – compared with too low inflation in 2017 –, and we are navigating through a geopolitical environment that looks unprecedented in its uncertainty. Due to this uncertainty, binding forward guidance from Central Banks appears less relevant, and has rightly been put aside in the recent past. But this is not an argument for returning to the secrecy that characterised central banking until the 1990s. One of the most topical questions for central banks is therefore how to ensure a “new predictability”. i Indeed, not having forward guidance does not mean, cannot mean, not having a narrative and a monetary strategy. Let me elaborate on this today, first laying out the reasons why we have to act in a determined way to deliver our 2% inflation target (I), then proposing some milestones on our normalisation path (II) and finally shedding light on one sensitive coordination issue (III). I.

This assessment should according to me follow a four-pronged approach, with four key indicators:  First, actual inflation data, focusing on underlying inflation, as this is the part for which monetary policy is relevant. In particular we should look at measures of HICP excluding energy and food, and at negotiated wage growth: by the way, we don’t see so far signs of a generalised wage-price spiral. A turning point – which we don’t see yet – will be when underlying inflation is peaking. 7  Page 8 sur 14  Alternative measures of underlying inflation are less noisy than the standard index excluding food and energy and thus can better signal the medium term inflationary pressures. Indeed, in the aftermath of the pandemic, the three alternative measures shown on this slide (persistent and common component of inflation, trimmediii and finecoreiv) have turned up earlier than the standard core index. And both in 2008 and in 2011-2012, they have also signalled earlier the easing of inflationary pressures.  Second, future inflation. We will obviously use our models and forecasts, but we should also give a strong attention to inflation expectations by financial markets and still more by economic agents: entrepreneurs and households are the real price- and wage-setters. Here so far, 3 to 5 year inflation expectations remain well anchored in markets, but with some mixed signals from businesses and households. Any sign of stronger de-anchoring would call for a stronger monetary reaction.
Knowledge of the size of this uncertainty can in itself be relevant for those who wish to form an idea of how the repo rate will develop in future. There are various methods that can be used to form an idea of how great the probability is of the repo rate being within a particular interval at a particular time in the future. We made an analysis in a box in the last Inflation Report as to how this kind of uncertainty interval can be calculated and presented two different methods 4 . In the first method, the implied forward rates are calculated for various points back in time. A study is then made of how well the implied forward rates have anticipated the actual development of the repo rate. Based on the “forecasting errors” it is possible to calculate the uncertainty interval around the forecast given by the implied forward rate path. The method is thus retrospective. Unsurprisingly, the calculations show that the spread of the deviations (the standard deviation) increases with the length of the forecast horizon (see Figure 4). This illustrates the uncertainty about macroeconomic developments in general and that the probability for unexpected disturbances arising in the economy increases with the length of the forecast horizon. 2  See also the Separate Minutes of the Executive Board, No. 4, 2006. 3  See also Nyberg, L., “House price developments and monetary policy”, speech at Evli Bank, 19 December 2005.

Let me take the opportunity here to touch on a question that sometimes arises when we comment on market expectations of the development of the repo rate in connection with a monetary policy decision: What expectations do we normally relate to when making our interest rate decision? The expectations reflected by the implied forward rate path on which the forecasts in the Inflation Report are based, or the expectations applying at our monetary policy meetings? It is unavoidable that some time passes from finishing the forecasting work to the publication of the Inflation Report. New information can become available during these days that affects the implied forward rate path. At the monetary policy meeting, the Executive Board always makes an assessment of whether the new available information since the forecasts were made gives rise to any change in the analyses and forecasts. If this is the case, it is explained in connection with the presentation of the report and the announcement of the monetary policy decision. However, the path of implied forward rates changes from day to day and over time as new information is received and new assessments are made. There is no reason for the Riksbank to comment on every small shift of the implied forward rate path in hundredths or tenths. The precision of the inflation forecasts is hardly so great that it is worthwhile attempting to distinguish the consequences of minor shifts in the interest rate path for our forecasts.
Also, the objectives under the IPA-2009 project on “Regional statistical cooperation programme for the Balkans countries” were successfully completed and project coordinators have commended the Bank of Albania. Other (research, human resources, communication and transparency, integration process) In addition to fulfilment of legal duties, the Bank of Albania is committed to attaining other objectives that help in completing a modern central bank’s role in economy. Bank of Albania intensified its research and academic activities in international arena during 2012. Worth of note is the 10th International Conference on “Monetary Policy: From the past to the present”, which was coordinated with other activities in the framework of the 100th anniversary of Albania’s Independence. Also, through the Institute of Economic Studies, we have promoted the broad interest of Albanian and foreign researchers, and have organised two regional workshops. Since some years ago, the Bank of Albania has put on focus of its development plan, the improvement of bridges of communication with the public and enhancement of transparency. During 2012, we continued to complete the published information and diversify it according to target audience. We built up contacts with the media and intensified our efforts in financial education, aiming to increase financial literacy and clearly transmit the Bank of Albania’s messages. The Bank of Albania was an active participant in fulfilment of obligations arising from the SAA, Central European Free Trade Agreement, and other national commitments. BIS central bankers’ speeches  5  International authorities have assessed the Bank of Albania’s work progress as positive.

Strengthening the ethical culture of financial services should therefore reduce the volume of bad behavior we have been seeing. Some of the skeptics say, “Prove it.” I confess that proof is hard to come by. Yet, I am not alone in the fundamental belief that a strong ethical culture will lead to better behavior. A 2010 Corporate Executive Board survey of more than 500,000 respondents shows a widespread  1  To call enforcement traditional is not to say that it is static. Eric Holder, the Attorney General of the United States, recently recommended that Congress create new criminal liability for bank officers who were in a position to detect and deter illegal conduct, but failed to do so. That is, individual executives could be criminally liable for failings within their organization without specific bad intent. See Eric Holder, Remarks on Financial Fraud Prosecutions at NYU School of Law, September 17, 2014. BIS central bankers’ speeches  1  view that corporations with strong ethical cultures experience less misconduct. 2 This makes intuitive sense even in the absence of empirical proof. 3 Further, the natural tendency to go with the intuitive is bolstered by the potential benefit of a reduction in enforcement actions against financial services firms, and by a healthy change in the public perception of the financial services industry. And, of course, there is ready evidence for the contrapositive view.
Namely, if the policy prescriptions for achieving the inflation and unemployment goals are in conflict, we will take a balanced approach promoting the return to each, taking into account the size of the deviations and the relative  3  2  See FOMC (2005). BIS central bankers’ speeches  speeds at which convergence can be expected. As we all know in this audience, there is an enormous literature related to characterizing the monetary policy loss function for a central bank with a dual mandate – such as work by John Taylor, Lars Svensson and Michael Woodford.4 For me, our Federal Reserve dual mandate responsibilities are well captured by a quadratic loss function that equally weights squared deviations of inflation and unemployment from their period goal values. In the U.S. today, that would be 2 percent for inflation and 5-1/4 to 6 percent for unemployment given today’s structural challenges in the labor market.5 Just about every major central bank around the world publishes something akin to such a framework statement. In one way, the Federal Reserve is different because, unlike other countries, we have a dual mandate, and so our framework explicitly addresses goals for both inflation and the real side of the economy. But just about every bank with a single price stability mandate also says that it will avoid undue disruptions to the real side of the economy when pursing its inflation goal. Indeed, some are quite clear about following a flexible inflation targeting strategy. Policy projections What about the policy projections?

There are two important ingredients: Our explicit inflation objective is 2 percent, and this is to be achieved over the long run. As recently as 2005, many FOMC participants preferred to describe a range of inflation outcomes as being consistent with our inflation mandate instead of stating it as a single number.3 Our current statement narrows our objective to 2 percent. It also sees this as an average that we aim to achieve over the long run, in recognition of the obvious realism that inflation may deviate from this goal from time to time owing to economic challenges, conflicts in achieving the dual mandate objectives and difficulties in the policy transmission channels. The statement also notes that maximum employment is largely determined by nonmonetary factors, which are difficult to measure and may change over time. Hence, we cannot and do not specify a fixed, time-invariant goal for it. But FOMC participants can provide their current assessments of goal variables related to the achievement of maximum employment. We do so using the central tendency of FOMC participants’ projections for the rate that unemployment would converge to in the absence of further shocks to the economy. As of January 2012, this rate is 5-1/4 to 6 percent. The statement also indicates that policy will seek to mitigate deviations in inflation and unemployment from these longer-run goals, and addresses the weighting of relevant costs and benefits when trying to close these gaps.
The maturing principal payments from securities purchased under the PEPP will be reinvested until at least the end of 2024, and in the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly. Further, at our meeting of 14 April, the Governing Council judged that the incoming data reinforced our expectation that net asset purchases under the asset purchase programme (APP) should be concluded in the third quarter of 2022. We also indicated that the raising of key ECB interest rates will take place some time after the end of the net purchases and will be gradual. Lastly, the ECB Governing Council stated that we stand ready to adjust all of our instruments within our mandate, incorporating flexibility if warranted, to ensure that inflation stabilises at its 2% target over the medium term. The pandemic has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped to counter the impaired transmission of monetary policy and made the Governing Council’s efforts to achieve its goal more effective. Within the Governing Council’s mandate, under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability. In step with the communication of this process of monetary policy normalisation, market expectations of policy rate hikes have been brought forward since December. The prospect of the monetary policy stance returning to normal has likewise been reflected in an upturn in long-term interest rates in the euro area.

After the “sprint” to monetary normalisation started in July 2022, we are now entering a new phase of monetary policy that is more comparable to a longdistance race: it will be longer – above all we must not claim victory too rapidly -, but more gradual and more pragmatic in the pace of the next interest rate hikes. It is clearly too early to tell beyond the 3% that we are expected to reach in March – which is well below the current rate of 4.75% in the United States, or 4% in the United Kingdom – at what "terminal" rate key rates will stabilise. But I believe it is possible to shed some light on the path that we should follow, in order to provide some degree of economic predictability. First, regarding the calendar, it seems to me desirable to reach this terminal rate by summer, i.e. by September at the latest. And our decisions will be guided by the economic data: our central criterion for deciding on monetary stabilisation should be the fairly certain turnaround in the underlying inflation trajectory. It is this underlying inflation that monetary policy can best treat, and which provides the best indication of the medium-term perspective of headline inflation. We have not yet reached that turnaround, that economic "threshold". I would also like to dispel a fear: the disinflation that we are about to carry out will not lead to a recession, given the resilience of economic activity and employment.
On Islamic finance, institutions such as Islamic Banking & Finance Institute Malaysia (IBFIM), Association of Shariah Advisors in Islamic Finance (ASAS), International Centre for Education in Islamic Finance (INCEIF) and International Shari’ah Research Academy for Islamic Finance (ISRA) were amongst the key affiliates that were given specific mandates for education and training. Similarly, the Chartered Institute of Islamic Finance Professionals (CIIF), then known as the Association of Chartered Islamic Finance Professionals (ACIFP), was identified as the key institution to develop professional standards and set the professional qualifications for the industry. The Institute, now entering its 5th year of establishment, is recognised as the industry’s own professional body through the Islamic Finance Profession Charter, and as such is strategically positioned as the platform for the development of ethically driven talent imbued with professional integrity. With the industry leadership on board as CIIF’s members, the professional body is expected to continue its momentum towards becoming an influential organisation that embodies the very best of Islamic finance professionals. On this note, we commend the industry’s effort to put the professionalisation agenda of the Islamic finance work force as utmost priority, through the signing of Joint Commitments between Association of Islamic Banking Institutions Malaysia (AIBIM), Malaysian Takaful Association (MTA), Association of Development Finance Institutions of Malaysia (ADFIM) with CIIF in 2018.

But, as I showed you, the protection of financial privacy is not an obstacle to an efficient fight against money laundering or the financing of terrorism, nor does it hamper fair tax competition with our neighbours if a withholding tax is implemented along the line of the EU directive. Both the disclosure of certain informations relating to bank clients and the protection of privacy in the financial sphere arise from fundamental ethical convictions that are worth protecting. I am confident that with a frank dialogue and mutual effort to understand each other’s position, the common values of the Swiss and British financial centres will again come to the forefront. In particular, it is our predominant joint interest to see the very demanding standards that we have set for our own financial industry become the world-wide accepted rules. The long history of our financial centres and the large experience of our banking industry should give us a natural leadership role in this respect. BIS Review 13/2002  7
BIS Review 6/2004  3  The choice of horizon for monetary policy implicitly provides some information about the central bank’s loss function.8 A central bank that places considerable emphasis on inflation and little emphasis on the real economy will choose a short horizon. A central bank that places considerable emphasis on the real economy will choose a long horizon. Behind the choice of a horizon of normally two years lies a perception of how the interest rate affects developments in inflation and output, and the central bank’s trade-off between variations in these two variables. According to theories on optimal monetary policy, the horizon should vary and partly depend on the size and duration of disturbances to the economy. For some types of disturbances, such as demand shocks, the optimal choice may be to achieve the inflation target relatively rapidly. For other types of disturbances, such as cost shocks, a longer horizon may be optimal, provided that confidence in monetary policy is not in jeopardy. Even though, according to the theory, the horizon should be variable, there are some advantages to maintaining a fairly firm horizon that have not been as prominent in the literature. It is crucial that the public and market participants understand how the central bank sets the interest rate in order to contribute to confidence and credibility in monetary policy. According to the principle normally followed by Norges Bank, the interest rate is set with a view to achieving inflation of 2½ per cent at the two-year horizon.

BIS Review 76/2009  11  Figure 9 Durable goods sales (index, average January 1996 - April 2009=100) 230  230  190  190  150  150  110  110  70  70  30  30  96  97  98  99  00  01  02  03  New automobiles' sales (units)  04  05  06  07  08  09  Capital goods imports (nominal)  Sources: Asociación Nacional Automotriz de Chile (ANAC) and Central Bank of Chile. Figure 10 Economic perception  (diffusion indexes, percent) Business confidence (1)  Consumers' confidence (2)  70  140  120  60  60  120  100  50  50  100  80  40  40  80  60  30  30  60  40  20  20  40  20  10  07 Brazil U.S. Japan  Jul. 08  China Mexico Eurozone  Jul. 09 S. Korea  07 Brazil China U.S. Mexico  Jul. 08  Jul. 09  S. Korea Japan Eurozone  (1) S. Korea is anchored in 100. (2) Series of Japan, Eurozone and S. Korea anchored in 50. The rest of the series are indexes with base January 2007=100. Source: Bloomberg. 12  BIS Review 76/2009  Figure 11 Stock market indicators (*) (Index 01/03/2005 =100) 400  Subprime crisis erupts  350  Bear Stearns  400  Lehman, AIG, etc.
However, the second half of the twentieth century saw many central banks also taking on the responsibility for statute-based micro prudential supervision. In many parts of the world banking laws were passed for the first time and the central bank often became the bank supervisor. In this process the distinction between the micro- and macro- perspectives became blurred. What has changed in the past ten to fifteen years is that central banks have started to give much more explicit emphasis than in the past on their macro prudential responsibilities and have distinguished it more clearly from the micro-supervision perspective. This renewed emphasis has several different sources. One of them was undoubtedly the financial crises that hit Asia in 1997. This experience showed that even if the individual banks in a financial system appear to be sound, the system itself can still be overwhelmed by financial shocks. For example, the system can be exposed to a common risk that isn’t obvious from looking at each bank individually. In the Asian crisis countries the exposures of banks to foreign exchange risks didn’t show up on bank balance sheets. The risks were instead in the balance sheets of their major borrowers, who had borrowed heavily in foreign currencies even though they had domestic currency cash-flows. And this also points to another feature of macro prudential concern – it cannot stop at the traditional boundary of the banking system, but must look at the risks in the nonbank financial sector and at the structure of household and corporate balance sheets.

There are also two other factors worth mentioning. The first is that central banks have become increasingly aware that monetary stability and financial stability are closely linked. It used to be said that the reason why central banks were concerned about banking system soundness was that the banks were the main transmission mechanism for monetary policy. This still remains largely true, but central bankers have come to recognise that other aspects of financial stability also matter from the point of view of being able to meet monetary policy goals. For example, as the bond market has become an increasingly important as a transmission mechanism for monetary policy, market conditions, the soundness of intermediaries, and the transparency and integrity of pricing have all become relevant issues for the central bank to consider. The debate that  2  BIS Review 106/2006  took place a few years back on whether central banks should also target asset price inflation as well as consumer price inflation is another example. A third factor has been the changing responsibilities of central banks. The recent emphasis given to macro prudential policy has coincided with the move, in some countries, to establish regulatory agencies separate from the central bank. The statutory responsibility for ensuring bank soundness has moved to these agencies, but the central bank has kept its traditional concern for the overall soundness of the financial system. This has led to a clearer distinction between the micro- and macroperspectives that had become blurred in the second half of the last century.