christine lagarde : frankfurt and europe in a new decade speech by ms christine lagarde, president of the european central bank, at the new year ’ s reception of the city of frankfurt, frankfurt am main, 16 january 2020. * * * first of all, let me start by wishing you all a happy new year! it really is a great pleasure to be part of this neujahrsempfang and to welcome in the new year with all of you, my new neighbours in my new home. you might be disappointed – or perhaps relieved – to learn that i won ’ t be talking about monetary policy this evening. we ’ re in the quiet period ahead of our governing council meeting next week where members do not discuss policy issues. frankfurt as a european city the character of every community is shaped by two choices we make : how we organise ourselves internally and how we relate to others externally. that ’ s true of companies and institutions, and it ’ s true of cities and regions, like frankfurt and the rhein - main area. arriving here as a newcomer, i was immediately struck by the inner character this city has developed : it is open, vibrant, aspirational. the history and culture of frankfurt instantly resonates – it is the birthplace of goethe, the site of the first german parliament in 1848, the famous home of apfelwein. but the feeling is also more than that. frankfurt is a community bristling with the creative energy of its financial industries, its data hubs, its start - ups, its universities. and there is a palpable sense of the civic pride that the people of frankfurt have for this city and their commitment to its success – what i understand you call the burgertum. indeed, i recently saw this in evidence during a visit to the stadel museum with jens weidmann. there i learnt how much the wonderful collection owes to the dedication of frankfurt ’ s citizens and their participation in various vereine that support it. but as important as frankfurt is as a german city, it has always been a european city, too. its internal vibrancy has been supported by an open external attitude. frankfurt was an important city in the holy roman empire of the german nation – a much earlier example of several states uniting to form a common political community – as the site of imperial elections and the place of imperial coronations. it has long been at the economic crossroads of europe, located on the most important

reassuring. on the other hand, the sticky information model suggests that, once longterm inflation expectations become de - anchored, their return to a level consistent with price stability may take time and effort on the part of the central bank. ricardo and gregory mankiw constructed and estimated a complete dynamic stochastic general equilibrium model with sticky information. 6 their dsge model features what the authors refer to as “ pervasive stickiness ” : the idea that information sets are updated sporadically, which originally applied to price - setting firms, is extended here to include consumers and workers. the resulting theory predicts gradual responses of consumption, output and wages to macroeconomic shocks, in addition to the sluggish response of prices. remarkably, sticky information is the only source of slow adjustment in the model. by contrast, the new keynesian dsge model requires multiple frictions, such as habit formation in consumption and investment adjustment costs, on top of price and wage stickiness, in order to capture the persistence in the macro data. the sticky information approach suggests that the origin of the pervasive slow adjustment in the data may be different from the sources highlighted in the new keynesian literature. in an influential pair of papers, “ inattentive producers ” and “ inattentive consumers ”, ricardo studied the decisions of agents who face the costs of acquiring, absorbing and processing information. 7 such agents rationally choose to be inattentive to news, only sporadically updating their information. the optimal frequency of updates, or the length of inattentiveness, depends on features of the economy such as the variance of shocks. upon aggregation, the economy behaves like the sticky information model of mankiw and reis. let me turn to ricardo ’ s work on the role of fiscal policy in business cycles. while a large body of literature in this area exists, much of it assumes a representative agent and focuses on government purchases or taxes. ricardo, in a joint paper with hyunseung oh, documented that during the great recession much of the increase in government expenditures across the oecd countries was in government transfers. 8 to study the effects of transfers, ricardo and his coauthor proposed a model without a representative agent or ricardian equivalence, in which transfers affect the economy because of imperfect credit markets, uncertainty and sticky information. building on this work, ricardo and alisdair mckay constructed a model to assess the role of automatic stabilisers in business cycles. 9