conference of the chair bdf / pse, paris school of economics current challenges of monetary policy september 24, 2019 speech i by francois villeroy de galhau, governor of the banque de france press contact : mark deen ( mark. deen @ banque - france. fr ). page 1 sur 11 ladies and gentlemen, it is a particular pleasure to welcome you on the occasion of the 10th anniversary of the chair banque de france / pse. all anniversaries are worthy of celebration, but the continued partnership of banque de france with the paris school of economics is a particular reason for cheer. over the past ten years, it has been a testimony of how academic research and economic policy making can reinforce each other. in the past ten years, thanks to their interaction, much has been done to make our financial environment more capable of reining in financial excesses. thanks to both, we have introduced many new unconventional tools to implement monetary policy. but these changes have also brought new questions and new uncertainties, on which more academic research is needed. hence, i would like to elaborate on two present challenges : the conduct of monetary policy in our current economic environment, and the interaction between monetary policy and financial stability. * * 1. monetary policy in the face of new challenges 1. 1. a new environment calling for new responses these new uncertainties arise at a time when the global economic environment has itself become increasingly uncertain. in the short term, many of the uncertainties obstructing the economic outlook – and especially the manufacturing sector – are man - made – and even one - man made. contingencies that not so long ago appeared as tail risks, such as the possibility of an escalation of trade tensions or a disorderly brexit, have become looming threats. but uncertainty also pertains to long - term structural trends. over the past decade, the world economy has steadily recovered from the global financial page 2 sur 11 crisis. but it has not returned to its pre - crisis normal. interest rates remain at historical lows, due to a historically low level of the natural rate of interest r * ii. in the short run, this analysis – uncertainty as the first trigger of the present slowdown – should guide our ranking of policy answers. monetary policy plays its role, but it should not – less than ever – be the only game in town. it should not even be the first game in town. the first response

would be for government - driven uncertainties to be addressed directly by governments, by removing the self - induced threats to world growth. failing that, a second answer is for fiscal policy to step in. fiscal stimulus from countries with fiscal space would both stimulate aggregate demand, and, with targeted, quality investment, increase long - term growth. iii wage increases in countries that have long relied on wage moderation could also help in bolstering aggregate demand and inflation. and pro - growth reforms would raise r *. monetary policy provides a third response. for the past ten years, there is little doubt that ecb monetary policy under mario draghi ’ s presidency has made a decisive contribution not only to safeguarding the euro in 2012, but also to the significant recovery of the euro area since 2013. over this period, more than 10 million jobs have been created. our unconventional measures are estimated to add almost 2 percentage points of growth and of inflation between 2016 and 2020. since i am talking to an audience of researchers i should of course emphasise that such numbers are subject to uncertainty. however, the most recent monetary policy decisions of the governing council have given rise to many comments. my rule of conduct has been to not add mine in the heat of the moment. two weeks later, let me only say that i supported many elements of the package, including the strengthening of the state - dependent forward guidance and the welcome introduction of a tiering system, similar to those in all other jurisdictions with negative interest rates. but i was not in favour of the resumption of net asset purchases at this time, because i thought that further purchases are unnecessary right now, given page 3 sur 11 the very low levels of both long - term interest rates and term premia, which have continued to decrease significantly since we stopped net purchases last december. the main purpose of qe is to extract more duration risk from the bond market ; indeed, term premia have already been successfully compressed – the term premium on a 10 - year ois is estimated to be significantly negative at around - 60 to - 100 bp. i also think that the significant strengthening of our forward guidance, the consequent prolongation of the reinvestment period for the very important stock of qe assets – 2600 billion euros –, and the dfr cut, were already a powerful and consistent combination. the forward guidance now states that we expect rates to remain at their present levels, or lower, until the inflation outlook robustly converge