christian noyer : re - examining central bank orthodoxy for un - orthodox times speech by mr christian noyer, governor of the bank of france and chairman of the board of directors of the bank for international settlements, at the conference of the global interdependence center / bank of france, paris, 26 march 2012. * * * the unconventional policies implemented during the crisis have transformed the face of central banking. but will these changes prove permanent and will “ the unconventional become the new normal? ” there is not yet definitive answer to this question. we may not, as easily as we would like, be able to revert exactly to the status quo ante. however, i strongly believe we must make sure that the gains from the pre - crisis period, in terms of monetary and price stability, are not compromised in the process. prior to the crisis, a description of central banks would have centred on four characteristics : they were focused with price stability being their primary or key objective, and no responsibility was sought or given for financial stability ; they were of limited size with very small balance sheets and interest rates as their only policy instrument ; they were independent, a condition recognised as necessary to anchor inflation expectations, and embodied in very strong institutional frameworks ; and they were successful : the “ great moderation ”, a period of exceptional low volatility in output and inflation, was widely seen as a product of efficient and wise monetary policies. there was a happy feeling that, at last, a perennial monetary regime had been found, well - tailored to the characteristics of a modern market economy. financial markets were efficient and the zero lower bound and liquidity trap appeared to be no more than historical curiosities. with hindsight, of course, we can see now that this “ ideal ” economy may never have existed. the great moderation was as much a product of “ good luck ” ( brought by disinflationary effects of globalisation ) than good policy. monetary stability is a necessary but not a sufficient condition of financial stability, because capital markets are not always and necessarily efficient. and downward financial spirals may quickly bring our economies to the point where interest rates can no longer be used as effective tools. therefore, as the crisis unfolded, central banks responded by taking unprecedented measures and, in the process, underwent three major changes a diversification of their interventions. in order to both : unclog financial markets ( both private and public ). this involved exceptional liquidity provision to

the euro area with persistently high unemployment, which curbs wage rises and weakens demand and price growth. moreover, structural factors, such as the ageing population, are also likely to exert downward pressure on the “ natural ” – or “ wicksellian ” – interest rate. this rate can be defined as the interest rate consistent with the full employment of the factors of production. in this case, in order to achieve the right balance between savings and investment, markets rates must come down too. in normal times, central banks cut their key rates, and this passes through to the yield curve. however, in order to deal with the financial crisis, the ecb like other central banks have brought their key interest rates to very low levels, around zero. this means that our traditional monetary policy tools had to be supplemented by other instruments, known as non - standard instruments, in order to reach our prices stability objective. i will return to this point later. b ) what is more with regard to the challenges we currently face, these deflationary pressures create the risk of an unanchoring of expectations, which would make it harder for us to achieve our 2 % target again. indeed, if inflation stayed too low for too long, economic agents may revise downwards their inflation expectations, which would create second round effects. lower inflation expectations influence economic agents ’ price - and wage - setting behaviour, which in turn keeps inflation low. it can even raise the risk of deflation, defined as a cumulative process of falling prices, including those of assets, or even wages and production, as the world economy experienced in the 1930s or japan partially underwent in the 1990s. such deflationary dynamics are not at play today. but this risk is the bis central bankers ’ speeches reason why our inflation target is symmetrical. we consider too low inflation to be just as costly as too high inflation. and, therefore, it is more risky for central banks to act too late than too early. since the start of the year, we have observed that market - based measures of inflation expectations have fallen. nevertheless, the latest forecasts provided by the ecb continue to point to a gradual rise in inflation over the coming years : 0. 1 % in 2016, 1. 3 % in 2017 and 1. 6 % in 2018. c ) some argue that these challenges mean that the eurosystem can no longer achieve its price stability mandate. i don ’ t think so. current challenges do not call