François Villeroy de Galhau: European Central Bank monetary policy and the resilience of the eurozone Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at Columbia University, New York City, 19 April 2017. * * * Accompanying slides. I am grateful to P. Antipa, L. Py, T. Mouakil, F. Haas, Ph. Andrade, B. Mojon and M. Dujardin for their assistance in preparing these remarks. Thank you for inviting me to Columbia University and your School of International and Public Affairs (SIPA). Columbia University is well-known as an institution of excellence. What might be less well-known is that Columbia has a unique relationship with France and with my institution, the Banque de France. Let me say from the outset that I will not comment on the current events in France and on our presidential election: I would just like to remind you that there are two rounds, the first one on Sunday and the second one on 7 May. Especially in moments like these, it is worth looking past the present, with a long-term view. The Maison Française on the campus was created 100 years ago. Your French department is one of the best in the United States. Moreover, the Banque de France has always followed very closely and valued Columbia academic production, including two concepts that I will use today: the research of Robert Mundell on Optimal Currency Areas and the research of Mike Woodford on Forward Guidance.
The policy rate is a blunt instrument in counteracting financial imbalances, as it has a broad impact on the economy. But at the same time, it can be a strength compared with macroprudential tools exactly because it is difficult not to be affected by a policy rate increase – monetary policy “gets in all of the cracks”, to use an expression minted by Jeremy Stein, previously on the Federal Reserve Board of Governors.18 Low interest rates over a long time can contribute to imbalances Macroprudential policy may also need support if monetary policy is actually a contributory factor to the imbalances the macroprudential policy is trying to counteract. This is an argument that has arisen both with regard to “the Great Moderation” and the origins of the financial crisis, and to the period that followed. If monetary policy is very expansionary over a long period of time, it may contribute, despite being justified with regard to the prevailing economic situation, to the build-up of imbalances on the financial side of the economy – for instance, the formation of distorted expectations of how high interest rates will be in the future and of how the housing market will develop, and so on. In this type of environment monetary policy may need to support macroprudential policy, by contributing less to such imbalances building up in the first place.