François Villeroy de Galhau: How to revisit central banking and financial stability?

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Peterson Institute for International Economics, Washington DC, virtual event, 13 April 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Ladies and Gentlemen,

It is a pleasure to be with you today, and I extend my warmest thanks to Adam Posen for his kind welcome speech. As you know, we are living a period of great uncertainties. Yet in this deep mist, one thing is clear: the Covid crisis has increased expectations among the general public about what central banks can and should do, and hence relaunched the debate about their objectives, be it climate mitigation or the fight against inequalities. Admittedly, this is a sign of great confidence: central banks are clearly the victims of their own success in their central roles of price stability. However, as Benjamin Franklin reportedly said: "There are many roads to success, but only one sure road to failure; and that is to try to please everyone." These additional expectations run the risk of growing confusion and disappointment. Today I will first elaborate on our inflation objective. Although the title of today's lecture invites us to "revisit" central banking, inflation targeting is and will remain the principal edifice in the shared estate of central banking. I will turn to the question of three of the new expectations on central banks, that we at the ECB are currently discussing as part of the Strategic Review rightly initiated by Christine Lagarde.

I. Inflation remains the principal edifice of the Central Bank's Construct

I.A. The past: had inflation disappeared?

When it comes to inflation, the last decade left economists and central bankers confronting a number of puzzles. The Great recession of 2008–09 exhibited a "missing deflation", when the important contraction of output was not associated with a consequent fall of prices. The recent years, on the contrary, were characterised as a period of "missing inflation".