yves mersch : the changing role of central banking speech by mr yves mersch, member of the executive board of the european central bank, at the lamfalussy lectures conference of the lamfalussy award at magyar nemzeti bank ( the central bank of hungary ), budapest, 4 february 2019. * * * john von neumann, the hungarian - born mathematician, once said : “ there ’ s no sense in being precise when you don ’ t even know what you ’ re talking about ”. i saw alexandre lamfalussy in many different roles over the course of 30 years, and i always admired his capacity to be extremely precise because he was professionally knowledgeable. it is therefore a great honour for me to be awarded a prize in memory of a man who made such an important contribution to european integration. during many years representing my country of origin in the belgian constituency at the imf, i witnessed the intellectual strengths of the hungarian representatives, especially from the central bank. i therefore feel particularly flattered to have been awarded this prize by the magyar nemzeti bank and its president, mr matolcsy. i also want to express my thanks to governor ewald nowotny of the oesterreichische nationalbank, who is also a firm believer in the need to bring the people of our continent together without nations trying to dominate each other. indeed, i feel very humble and modest in this environment. i was lucky to be able to develop my views and opinions when accompanying my highest political authorities in their meetings for more than 20 years. moreover, my family provided me with two solid foundations : resistance to illiberalism during world war ii, and the respect of the rule of law. i have been veering between what benoit mandelbrot called “ the two poles of human experience ”, one driven by my legal background and the deterministic system of order and planning, and the other inspired by my lifelong experience with finance and the stochastic or random systems of irregularity and unpredictability. trying to straddle the two poles with insights from political science brings me to today ’ s theme : the changing role of central banks. mandelbrot said of the great financial crisis : “ financial economics, as a discipline, is where chemistry was in the sixteenth century : a messy compendium of proven know - how, misty folkwisdom, unexamined assumptions and grandiose speculation.

arbitrage between instruments and between markets. if a clear arbitrage opportunity is left unexploited, someone is most likely to take advantage of that opportunity to gain profits, thereby bringing about a price correction. assuming the presence of private economic agents in pursuit of profits, this understanding is quite reasonable. of course, this understanding is based on the following strong premises : ( 1 ) investors behave rationally, and ( 2 ) information that would affect prices becomes available instantly and there is no information disparity in the markets. therefore, it is not difficult to find cases where this understanding is not applicable in reality. however, i feel that this theory is significant in that it provides the basic perspectives for the functioning of financial markets. supposing that an arbitrage opportunity is apparently present, the theory would be the basis for discussions on issues such as why that occurred, whether the market is just taking time to adapt and adjust and an autonomous adjustment can be expected, and whether the situation should be artificially corrected by implementing some sort of measures. ii. mutual feedback with the actual markets the significance of traditional theory on financial markets is generally accepted not only in academia, but also among many market participants. however, as i have mentioned, there are quite a few phenomena in actual financial markets for which such theory might not provide a satisfactory explanation. it is believed these difficulties are attributable to various factors ; three of which i will explain now. difficulties in utilization of market data practical hurdles are one of the factors that make it difficult for traditional theory to be fully adopted. in relation to asset prices, there often are constraints in utilizing data in practice. specifically, expected inflation rates and term premiums included in long - term interest rates are not directly observable, even though they are widely accepted concepts. estimated figures should be seen with a considerable margin as there is no consensus on modeling and formulation. in addition, there are cases where data availability is a high hurdle in practice. apart from data that are not observable, which i have just described, there are those that are not collected, those that are regarded as private information and are not for general use, and those that are hidden and therefore their usefulness is not known. on this point, it should be noted that, against the background of the evolution of information processing technology such as natural language processing, image recognition, and machine learning, as well as improvements in the performance of computers, a trend towards utilizing