jackson hole economic symposium, 27 august 2022 monetary policy post - pandemic : balancing between science and art, predictability and reactivity speech by francois villeroy de galhau, governor of the banque de france page 1 sur 8 ladies and gentlemen, this is the first time i have been able to attend the jackson hole symposium, but this renowned event epitomizes something i have always found of great value in the daily practice of central banking : the continuing conversation between policy makers and economic researchers. in this respect, the central banking world is a remarkable exception relative to most public policy making. this unique culture brings with it the recurring debate of how much of monetary policy amounts to science or art. this is especially the case at the end of a very uncertain summer : for europe at least, growth prospects for next year have receded, and inflation prospects increased, due to energy and gas price pressures and additionally to the evolution of the exchange rate. today i would like to briefly look back at how useful science has been in the past ( i ). i will then offer suggestions on how to balance art and science in the current policy environment : in finding a “ new predictability ” despite the weakening of forward guidance ( ii ), and in facing the unprecedented challenge of the positive remuneration of massive excess liquidity ( iii ). i. science did well both before and during the pandemic the view that monetary policy consists of science was perhaps most prominent during the great moderation. page 2 sur 8 but what about the great financial crisis, the pandemic and the russian war? if, as olivier blanchard said in 2006, “ monetary policy must be closer to art when it is frequently confronted to new, poorly anticipated and poorly understood, contingencies ”, the economic shocks of the past 15 years must surely have shifted the pendulum back to art. i i would actually argue that, even then, science served us well. let me here cite olivier garnier, chief economist of banque de france. ii i believe we central bankers can be proud of the joint achievements of policy and research in dealing with the global financial crisis and its aftermath : acknowledging common mistakes in forecasts on the current level of inflation doesn ’ t imply becoming self - critical on policies. in the euro area, thanks to our “ new conventional ” tools, inflation is estimated in 2019 to have been around 75 basis points higher, and gdp growth 110 basis points higher than it would have been in

this regard, rather than our profit and loss statement, is the financial solidity of central banks ’ balance sheets through their levels of capitalized reserves. the effect on banks ’ net interest income nevertheless, if opposite in sign to the one under negative rates, could also distort the transmission of our monetary policy. just as we did with the tiering scheme, we have to think about a reserve remuneration system adapted to this new context, as the ecb announced it in our july decisions. we will conduct this assessment in a swift and pragmatic way, looking at various options having existed across history and across jurisdictions. * * the high uncertainty in which we must at present navigate the normalization of monetary policy means that we will have to artfully deal with the unexpected. perhaps however, accepting this uncertainty is, if not what science is typically associated with, at least what rationality commands. voltaire said, “ uncertainty is not a pleasant condition, but certainty is absurd ”. xii two hundred years later, bertrand russell wrote that “ not to be absolutely certain [ is ] one of the essential things in rationality ”. xiii i am glad we still need science, including on the new challenges i stressed, to reconcile uncertainty and rationality. blanchard ( 2006 ). garnier ( 2022 ), presidential lecture at the french economic association. iii rostagno et al. ( 2021 ). iv see savignac, gautier, gorodnichenko and coibion ( 2021 ) for first results on a new survey conducted by the banque de france on expectations of french firms. v see coibion gorodnichenko kumar ( 2018 ), coibion gorodnichenko ropele ( 2020 ), and rosolia ( 2021 ) for the few papers that seek to empirically assess the effect of inflation expectations on pricesetting. vi see werning ( 2022 ) for recent advances on these questions from a theoretical perspective. vii brunner ( 1981 ). viii brainard ( 1967 ). ix dupraz guilloux - nefussi penalver ( 2020 ). x see cukierman ( 1991 ) and stein and sunderam ( 2018 ). xi see weidmann ( 2022 ), jacobsson lecture, for a recent articulation of this idea. xii in a letter to frederick ii, king of prussia, on april 6, 1767. xiii russell ( 1947 ). i ii