benoit cœure : monetary policy, exchange rates and capital flows speech by mr benoit cœure, member of the executive board of the european central bank, at the 18th jacques polak annual research conference, hosted by the international monetary fund, washington dc, 3 november 2017. * * * i would like to thank t. kostka, a. mehl, i. van robays and j. grab for their contributions to this speech. i remain solely responsible for the opinions contained herein. central bank asset purchase programmes are often catalysts for significant cross - border capital flows. by compressing the ( excess ) return on domestic bonds, they encourage investors to rebalance their portfolios towards foreign, higher yielding assets. 1 such capital flows have reached historical dimensions in the case of the ecb ’ s asset purchase programme ( app ), with both resident and non - resident investors moving out of euro - denominated securities and into bonds issued predominantly by the safest non - euro area sovereigns. i examined these flows in detail in a recent speech at the ecb ’ s foreign exchange contact group meeting. 2 one intriguing observation i made in this speech was that there was no evidence of a causal link between such capital flows and exchange rate movements. findings based on event studies instead suggest that, around the time of central bank asset purchase announcements, investors price the exchange rate mainly on the basis of the information these programmes provide to markets about the expected future path of short - term interest rates. in this sense, the effect of asset purchases on exchange rates is not fundamentally different from that of conventional interest rate policy. today i would like to build on this previous contribution and provide further insights into the channels through which central bank asset purchase programmes are likely to affect the exchange rate. i will provide suggestive evidence that challenges the widely held view in the event - study literature that policy - induced portfolio rebalancing does not affect the exchange rate. 3 my remarks therefore confirm that portfolio rebalancing is a major transmission channel of central bank asset purchase programmes and provide some tentative support to theories of exchange rate determination in imperfect financial markets, which give a first - order role to capital flows. 4 unlike private portfolio rebalancing, however, central bank asset purchase programmes can be anticipated by investors. this means that exchange rates should adjust in a way that clears the expected future supply of and demand for currency resulting from anticipated cross - border capital flows. the implication is that asset purchase programmes

staff macroeconomic projections indicate continued progress in reducing fiscal imbalances in the euro area. the aggregate euro area general government deficit is expected to have declined to 3. 2 % of gdp in 2013 and is projected to bis central bankers ’ speeches be reduced further to 2. 7 % of gdp this year. general government debt is projected to peak at 93. 5 % of gdp in 2014, before declining slightly in 2015. looking ahead, euro area countries should not unravel past consolidation efforts and should put high government debt ratios on a downward trajectory over the medium term. fiscal strategies should be in line with the stability and growth pact and should ensure a growth - friendly composition of consolidation which combines improving the quality and efficiency of public services with minimising distortionary effects of taxation. national authorities should also continue with the decisive implementation of structural reforms in all euro area countries. these reforms should aim, in particular, to make it easier to do business and to boost employment, thus enhancing the euro area ’ s growth potential and reducing unemployment in the euro area countries. to this end, the governing council welcomes the european commission ’ s communication of yesterday on the prevention and correction of macroeconomic imbalances and on the excessive deficit procedure. looking ahead, it is key that the macroeconomic surveillance framework in the euro area, which was significantly strengthened in the wake of the sovereign debt crisis, is implemented fully and in a consistent manner. we are now at your disposal for questions. bis central bankers ’ speeches