François Villeroy de Galhau: International monetary spillovers - financial and intellectual linkages

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Bellagio event, Paris, 11 January 2024. 

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

It is a great pleasure to welcome the Bellagio group in Paris. The 80th anniversary of the D-day Landings this year is an important reminder that American and European histories are so closely inter-twined. Today this relation materialises through tight economic and financial linkages, the subject of my talk this afternoon.

1. Financial interlinkages and global monetary policy spillovers

In a globalized world, economies are linked through trade and financial flows. While these linkages help when domestic demand falters or domestic savings are scarce, they can also transmit adverse developments across borders. This is the essence of international risk sharing, which if taken to the limit would imply a common global cycle. Due to global value chains, spillovers and comovements in goods production have indeed risen over recent decades. However, there is less commonality in the production of services. The rising share of services in overall production has offset the increased integration of goods, so that the co-movement of economic activity between countries has not increased. The disruptions caused by Covid and Russia's unjustified invasion of Ukraine have shown the fragility of extended supply chains. Noticeably, there had already been some retrenchment in globalization indicators following the Great Financial Crisis, as shown in Figure 1 (Slide 2). However, fewer spillovers do not necessarily imply less volatility. In autarky, countries depend entirely on their own industries and there is less ability to adjust to domestic shocks. On the financial side, the globalized economy features similar patterns. On the one hand, increased openness implies rising exposure to the global financial cycle. On the other hand, improved policy credibility and better monetary policy frameworks have allowed more countries to have freely floating exchange rates and independent monetary policy to meet domestic objectives.