François Villeroy de Galhau: Central banks' exit from the Garden of Eden

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Global Interdependence Center Conference, Paris, 28 June 2024.

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

Ladies and Gentlemen,

Welcome to Paris for the latest edition of the GIC conference. For many of the past forty years central banks have lived in a sort of economic Garden of Eden: an apparently peaceful life with easy choices. I will first describe this paradise of stable inflation (I). I will then describe the shocks that have ruptured this tranquility – the Great Volatility - presaging a world of heightened uncertainty: the Exit of the title (II). I will then outline strategies to respond to this more challenging world, emphasizing the importance of our independence and price stability mandate (III). 

I. A world of stable inflation and the rise of central bank credibility

The Great Moderation from the mid-1980s to the Global Financial Crisis (GFC) was a period of moderate inflation and steady growth in output, employment and living standards. This macroeconomic stability, after the turmoil of the 1970s, created great confidence on the part of researchers and policymakers in our capacity to smooth the business cycle, although there was a lively debate about whether this long period was due to 'good luck' or 'good policies'. Indeed, economic supply was augmented by the integration of Central and Eastern European economies and the further acceleration of globalization when China started to fully open up in the early 2000s. Moreover, political risks were generally low and technological innovation vibrant. 

This period was interrupted by the GFC in 2008 and the European Debt Crisis of 2010-2012. But central banks understood the nature of the shock relatively quickly and responded decisively with new tools targeting the provision of liquidity that prevented crisis-amplifying asset fire sales. What followed was a period of lowflation from 2012 to 2020 associated with very low global real interest rates. Falling r* reflected a global savings glut due to increased pension savings, trade imbalances and a motive for emerging market economies to self-insure.