toulouse school of economics – toulouse, 8 december 2022 the magnitude and distribution of the energy and trade shocks in the euro area and in france speech by francois villeroy de galhau, governor of the banque de france page 1 of 14 i am delighted to be with you today and i would like to warmly thank tse, jean tirole and other professors for giving me the opportunity to make this speech. my topic will be a very important issue at the current juncture, namely the external shock related to energy prices and the deterioration of the terms of trade, which are currently hitting european economies. today, in commodity - importing countries, the prices of imported products, especially energy products, are rising much more than the prices of exports. this is a net cost for commodity - importing countries, including france. in economic terms, the terms of trade, i. e. the ratio of export prices to import prices, are falling for those countries, thus reducing their purchasing power. in this speech i will start by describing the various ways we can assess the energy and trade shocks we are facing, and remind us of some measurement challenges they raise. the comparisons across countries and across time will also be instructive. the second key issue i will discuss is how this shock has so far affected the economic agents in france, and how the burden of this shock should be shared across categories of agents. i. the magnitude of the external tax : the energy and terms of trade shocks i. 1 what happened? page 2 of 14 let me begin by noting that the first peaks on gas and electricity prices took place in the summer of 2021 in the context of the global post - pandemic recovery, when european countries had to build up their gas stocks for the winter and when demand for natural gas in asia and the united states strongly increased. in this context the price of metals for example almost doubled from 2020 to mid - 2021. tensions in the oil market also emerged during the second half of 2021. then, the russian war in ukraine has caused gas prices to soar. electricity prices have also reached record levels : as you know, the price of electricity on the wholesale market is closely correlated to the price of gas paid by the marginal electricity producer. as regards non - energy industrial goods, the first blow to european import prices was caused by disruptions in global production chains following the post - covid recovery. the next blow was the gradual spread of higher raw material prices to all manufactured

stability, the bank introduced in january 2013 the price stability target of 2 percent in terms of the year - on - year rate of change in the cpi. then, in april of the same year, the bank introduced qqe to achieve the price stability target at the earliest possible time, with a time horizon of about two years. with its steady continuation so far, qqe has been exerting its intended effects. the bank has announced that it is committed to continuing with qqe, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. it will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate. the specific measures of qqe are as follows. first, with a view to pursuing quantitative monetary easing, the bank decided to increase the monetary base – which is the total amount of currency it directly supplies to the economy ( the sum of banknotes in circulation, coins in circulation, and current account deposits held by financial institutions at the bank ) – at an annual pace of about 60 – 70 trillion yen, thus doubling it in two years. second, to achieve this, the bank has been purchasing japanese government bonds ( jgbs ) so that their amount outstanding increases at an annual pace of about 50 trillion yen. in doing so, the bank has been working on interest rates across the yield curve – including longer - term ones – setting the average remaining maturity of its jgb purchases at about seven years. and third, the bank has been purchasing exchange - traded funds ( etfs ) and japan real estate investment trusts ( j - reits ) so that their amounts outstanding increase at an annual pace of about 1 trillion yen and about 30 billion yen, respectively. in conducting qqe, the bank keeps in mind two key transmission channels : ( 1 ) lowering real interest rates, which are obtained by subtracting expected rates of inflation from nominal long - term interest rates ; and ( 2 ) the portfolio rebalancing effect, which encourages financial institutions and institutional investors to shift their asset portfolio toward lending and investment in risk assets such as stocks. in lowering real interest rates, the bank first applies strong downward pressure on nominal long - term rates by tightening jgb market conditions through its massive purchases of jgbs. then, through a clear explanation of its determination to achieve the price stability target at the earliest possible time and the continuation of massive purchases of