christian noyer : the ecb is ready to fight deflation opinion piece by mr christian noyer, governor of the bank of france and chairman of the board of directors of the bank for international settlements, in wall street journal, 21 november 2013. * * * there is a lot of talk nowadays about the risk of a “ lost decade ” in the euro zone, with a conjunction of no growth and deflation. current forecasts point to very low inflation in the foreseeable future. for the euro area as a whole, inflation is projected to remain at around 1. 5 % in the coming year. however, low inflation is very different from deflation. deflation is a cumulative process of decreasing prices, wages and output fueled by negative expectations. deflation is a pernicious spiral. it increases the burden of debt and creates an incentive to defer consumption and investment. deflation is especially dangerous because once the process becomes entrenched, it becomes very difficult to stop. at the moment there are no signs of general deflation in the euro area and most indicators point to a very low risk. inflation expectations in particular remain firmly anchored in positive territory and, for the long term, stand at levels close to the european central bank ’ s definition of price stability. as usual, inflation rates vary in the different economies of the euro area. in some peripheral countries, inflation is particularly low. this, in a way, is a good thing, as it contributes to restoring their competitiveness, as witnessed by their strong export growth. however, the lower inflation is, the greater the risk that unexpected shocks could push the economy into deflationary territory. since this could, in turn, have consequences for overall euro - area inflation, it is perfectly justified to ask what should be done to minimize that risk. the best protection and the first line of defense against the risk of a lost decade is structural reform. structural reforms stimulate private consumption and make investment more profitable. in particular, they increase the return on capital and, as a consequence, the economy spontaneously moves towards an equilibrium with higher interest rates. in turn, higher equilibrium interest rates would make it easier for the european central bank to set its own policy rate at levels consistent with those needed by the economy. the chances that monetary policy becomes constrained by the lower bound of 0 % interest rates are reduced. higher equilibrium rates also benefit savers, a legitimate concern in many countries. basically, savers have a claim on future output.

of major determinants of inflation – fully recognized by the governing council of the ecb. that is the reason why we rely upon a binocular vision of the factors of inflation, i. e. as a monetary phenomenon according to pillar 1 and as the result of short - term to medium - term developments of inflation according to pillar 2. this framework is also well suited to addressing the asset price bubble issue. in this context, the first pillar is very helpful for analysing how ample liquidity is within the euro area, that is to say how much the broad monetary aggregate ( m3 ) deviates from its reference value, and how economic agents make use of this liquidity : credit and loan developments are carefully monitored, in line with economical and financial developments. portfolio shifts are also an important part of the monetary analysis. too rapid a credit expansion to the private sectors associated with large portfolios shifts towards equities and a strong rise in stock or asset prices would, under normal economic conditions, signal the risk of a bubble formation. the second pillar consists of a wide range of economic and financial indicators : stock and bond prices, housing prices, exchange rates are also analysed in depth. obviously, their assessment is made in the context of maintaining price stability over the medium term, and the ecb does not react to their signals unless price stability is endangered. to recap, if monetary policy does not react directly to asset price developments or to an asset price bubble, it has clearly to take under consideration all the consequences of these developments on aggregate demand and aggregate supply, on economic agents ’ confidence and expectations, since they may at some point affect price developments. let me now turn to my second point, that is the implications of asset prices bubbles for financial stability. 2. implications for financial stability over the last decade, we have experienced several financial crises and contagion episodes : just to name a few episodes, the mexican crisis in 1994 - 1995, the russian - ltcm in 1998, the “ tech - bubble ” that ended in 2000, or more recently the financial crises in argentina and turkey. however, recent j. m guttentag and r. j herring ( 1986 ), “ disaster myopia in international banking ”, essays in international finance, 164, princeton university. research has shown that, if the frequency of financial crisis is not significantly different from what was observed in previous periods over the long run ( 1883 - 1998 ), recent episodes were certainly shorter