here measured as the time - varying sensitivity of expected rates to expected inflation at the same horizon – has always been strong ( higher than one ) at long horizons. it suggests that markets anticipate an active reaction function in the medium - to long - run, and this sensitivity increased during the liftoff period from mid - 2022 to mid - 2023 at all horizons, suggesting that actions reinforced our credibility to fight inflation. 1. 2. from the vicious circle of inflation to the virtuous circle of credibility what we learned from the volcker period is that disinflation is costly and long to achieve for an imperfectly credible central bank. firms anticipating increasing costs are likely to increase their prices and workers anticipating increasing prices fight for higher wages leading to a vicious inflation circle and creating a strong correlation between current and expected inflation. imperfectly credible central banks must hence react more forcefully and swiftly. the induced much higher real rates may however quickly cause unemployment but without any immediate gains from price stability, such as lower long - term inflation risk premia. by contrast, a ( more ) credible central bank faces a virtuous circle of credibility. past credibility anchors inflation expectations at the target, reducing the risk of an inflation spiral. this reduces the size of the interest rate hikes necessary to bring inflation down, and the associated costs on economic activity. quantifying the impact of credibility is by no means easy, and surrounded with much page 6 sur 13 uncertainty. but banque de france research suggests that, had inflation expectations been as poorly anchored as they were in the 1970s in the us, our policy rates would have had to peak around 8 % instead of 4 % x. credibility also buys time. when a central bank is imperfectly credible, it must act immediately to calm any latent inflationary pressure and continually demonstrate that it aims at stabilizing inflation. but a credible central bank can react with a delay and still achieve nominal anchoring. indeed, davig and leeper argue that what really matters is the average reaction to inflation in the medium run and not the immediate response, a sort of “ long - run taylor principle ” xi. still, the delay should not be too long as it may be wrongly interpreted as a signal for future inaction. central bank credibility like inflation is also global xii. most central banks in advanced economies have credible and convergent inflation numerical targets ( 2 % ), a distinctive difference to the 1980s. this global credibility translates into less, and

new york university – 22 october 2024 “ a monetary policy perspective ( i ) : three lessons from the recent inflation surge ” speech by francois villeroy de galhau, governor of the banque de france press contact : delphine cuny ( delphine. cuny @ banque - france. fr ) page 2 sur 13 ladies and gentlemen, it is a great pleasure to be in new york and i am grateful to thomas philippon for his invitation. my theme today will be what first lessons we can learn for monetary policy from the surge and then decline in inflation. in the euro area, inflation reached 10. 6 % in october 2022 and exceeded 4 % for two years. but inflation was as rapid to decline and now, at 1. 7 % in september 2024, stands very close to our target of 2 %. since ben bernanke ’ s speech in 2004i, there is always a debate about whether favourable outcomes are good luck or good policy. and this time we have had a dose of good fortune. as shown in figure 1, energy and food prices contributed to inflation developments both uphill and downhill. but the return of inflation to 2 % and its speed of convergence are also due to our monetary policy. banque de france estimates shown in figure 2 suggest that hicp inflation would have been between 2. 5 % and 3 % higher in 2024 without monetary tightening, in line with ecb estimates ii. these estimates are even conservative as they do not include the effect on the anchoring of long - term inflation expectations. in taking stock of what we have learned during this episode, let me focus on three dimensions : monetary policy and disinflation ( i ) ; monetary policy and growth ( ii ) ; monetary policy and its instruments ( iii ). page 3 sur 13 i. monetary policy and disinflation : no magic, but a virtuous circle between past & present credibility, and between communication & action the relatively low cost of disinflation has not been a given. not so long ago, many observers were claiming that inflation would either proved persistent ( including in the ‘ last mile ’ ) and / or be eradicated only at the cost of a recession. why were they proven wrong so far? 1. 1. a tale of two disinflations : contrasting economic paths let me start with a tale of two disinflations : the great disinflation at the beginning of the 1980s in the us