The objective of a stable external value of the French franc vis-à-vis the most credible currencies in the European Exchange Rate Mechanism was met. BIS Review 2/1997  -2-  Since the beginning of 1996, the franc has continued to move gradually closer to its central rates against the other currencies in the European Exchange Rate Mechanism. This firmness of the franc has gone hand in hand with the continuing overall competitiveness of the French economy. The real effective exchange rate of the French franc has improved and exports, as in previous years, helped to boost activity. The seasonally-adjusted current account surplus for the first nine months of 1996 stood at almost FRF 84 billion. This was much greater than the FRF 64 billion surplus posted for the same period of 1995. On the basis of current forecasts, France will record the third largest current account surplus in the world for 1996. Growth in the M3 reference aggregate, which is the reference for our internal intermediate objective, showed a reversal in its trend. The expansion of M3 at the end of the third quarter of 1995 was close to its medium-term growth target path of 5%, but subsequently slowed sharply. The twelve-month increase of 4% in December 1995 gave way to a contraction of 0.4% in October 1996, the last month for which figures are available.
In fact, at times, when short-term rates have been pinned at the zero lower bound, the Federal Reserve has taken actions that eased financial conditions without changing shortterm interest rates. Such actions have included forward guidance that the FOMC was likely to keep short-term rates low for a long time and large-scale asset purchases that led to lower bond term premia. Now, as I said at the start, just because I don’t want to follow a rule mechanically does not mean that I favor the polar opposite – that is, a fully discretionary monetary policy in which market participants, households and businesses cannot anticipate how monetary policy is likely to evolve as economic and financial market conditions and the economic outlook change. If households and businesses do not have a good notion of how the Federal Reserve will respond to changing economic and financial market conditions, then this would loosen the linkage between short-term rates and financial conditions. This would also likely lead to greater uncertainty about the outlook and higher risk premia, and it would make it more difficult for policymakers to attain their objectives. Instead, what I favor is a careful elucidation of those factors that influence the economic outlook and how monetary policy is likely to respond to changes in the outlook. This includes fiscal policy, productivity growth, the international outlook and financial conditions, as well as how much employment and inflation deviate from the Fed’s objectives.