growth fuels inflation : we have all more or less learned irving fisher ’ s money quantity equation ( 1911 ) 1 and the monetarist theories that have dominated since milton friedman ( 1956 ). 2 however, this channel has gradually become less relevant. indeed, because of the volatility in the speed at which money circulates, the relationship between money growth and inflation fluctuates over time ; it is neither causal nor automatic. 3 that said, since its creation, the eurosystem has always monitored monetary aggregates, even if their relative importance has gradually declined – a change that was confirmed in our last strategic review in 2021. since the start of the asset purchases in 2014, money growth has remained contained. during the covid crisis, however, the exceptional fiscal and monetary support measures led temporarily to an expansion of household and corporate bank deposits : m3 growth reached 12. 5 % in january 2021. 4 but since then, growth in monetary aggregates has fallen steadily, reaching 4. 1 % in december 2022. a simplistic interpretation of the “ monetarist ” approach could therefore, paradoxically, prove reassuring today – but artificially so. irving fisher ( 1911 ), the purchasing power of money. milton friedman ( 1956 ), “ the quantity theory of money : a restatement ” in studies in the quantity theory of money, edited by m. friedman. see article by sargent and surico ( 2011 ) “ two illustrations of the quantity theory of money : breakdowns and revivals ”, american economic review, vol. 101, no. 1, and the bis bulletin by borio, hofmann and zakrajsek ( 2023 ) “ does money growth help explain the recent inflation surge? ”. for an analysis of the dynamics of the money supply during the public health crisis, see be duc, bricongne, bussiere, jude, penalver, sedillot, vari and wicky, “ the increase in the money supply during the covid crisis : analysis and implications ”, banque de france bulletin no. 239, 2022. page 4 of 19 the expectations channel while the steering of monetary aggregates has become less important, the steering of inflation expectations has gained significant ground in modern monetary theory, especially since the work of michael woodford. 5 these expectations play a key role – be they those of the financial markets in determining the level of interest rates, or those of economic agents ( businesses and households

best indication of the medium - term trajectory of headline inflation. will this turnaround require actual and duly observed falls in underlying inflation, or a sufficiently solid forecast of an expected fall in the very near term? prudence demands the first response, while the time taken for monetary policy transmission justifies the latter, so the governing council will have speech by francois villeroy de galhau at columbia university, new york, 11 october 2022, “ what monetary policy narrative after forward guidance? ”. page 14 of 19 to use its judgement. the other bigger question on an economic level is how best to define underlying inflation : i shall come back to this at the end. the duration of the stabilisation phase the other key variable is the duration the interest rate is kept at its so - called terminal level. it is our duty to repeat that the fight against inflation cannot be won without perseverance, and without keeping interest rates high for as long as necessary. we need to be wary of declaring victory too soon : the final kilometres of a long distance race are often the most decisive. here again i think we can give some pointers on this other essential “ lock ” : what economic data could guide us as to the length of this phase and lead us to one day envisage a lowering of the level of rates? this issue is of course further off in the future, and definitely not for this year. however, when the time comes, we will need to find the optimal balance between the level at which rates are stabilised, and for how long, as in a long distance race where you need to balance pace and distance. when we are sufficiently confident that we have reached the right rate level, it might be a good idea to give guidance on the criteria determining how long we stay there. the key criterion here seems to me to be a return to an inflation outlook that is compatible with our 2 % target, firmly and durably. firmly in the sense of being supported by actual data on headline inflation but also on underlying inflation. durably in the sense of being well ahead of the end of our projection horizon, and including, in my view, a decline towards 2 % of households ’ and businesses ’ inflation expectations. before concluding, however, we need to shed more light on two key elements of this economic narrative : underlying inflation and economic agents ’ expectations. the different measures of underlying inflation the aim of underlying inflation measures is to better estimate the change in the persistent component