Moreover, if it was permanent, then part of the “dividend” from this reduced macroeconomic volatility should be a greater willingness to take on risk. As it happens, the academic literature has so far failed to provide a conclusive answer on the relative contributions of the various explanations 3 . But what matters is how market participants responded to these benign conditions. They are faced with what is, in essence, a complex signal-extraction problem. But whereas many such problems in economics involve learning about first moments of a distribution, this involves making inferences about higher moments. The longer such a period of low volatility lasts, the more reasonable it is to assume that it is permanent. But as tail events are necessarily rarely observed, there is always going to be a danger of underestimating tail risks. Certainly it appears from measures of volatility implied from options prices for US equities (VIX) and treasuries (MOVE) that the perceived risks in financial markets had shrunk to extremely low levels by 2006; see Fig. 5. There are two ways of rationalising this. One possibility is straightforward extrapolation into the future of the benign experience of the preceding few years. An alternative and complementary explanation is excessive faith in the  2  The Great Moderation appears to have started rather earlier, in the mid-1980s, in the United States.
According to recent analysis of the Banque de France, a powerful narrative then emerges by comparing the average contribution of each of these factors between 1999-2007 and 2013-19: In the second period, macroeconomic shocks have turned disinflationary relative to the first decade of the Euro, pushing down inflation despite a partial offset by unconventional monetary policy. Page 4 sur 9  The unexplained or residual part of the inflation decline has averaged about 0.3 percentage points since 2013. Yet this share has been growing, suggesting that we need to pay close attention to its potential causes. Across the euro area in recent years, higher wages have been partly offset by squeezing corporate margins, particularly in market services. Another factor may be the possibility of a downward drift in long-term price expectations that could have followed from the prolonged period of low inflation. Last, but not least, structural changes may have impacted the process of price and wage formation, in the context of increased digitalisation and globalisation of our economies, and diminishing bargaining power of workers. Still, the quantitative weight of these structural factors is less than clear and has not achieved consensus among economists. I.B. The future: the return of inflation? The current debate on a potential return of inflation may be legitimate in the US ii, but not in the Euro area. In the US, the ongoing recovery is much faster than what was observed after previous crises and the output gap is projected to close and become positive in the course of 2021.