José de Gregorio: What does society expect from the financial sector? Panel discussion remarks by Mr José de Gregorio, Universidad de Chile and former Governor of the Central Bank of Chile following the Per Jacobsson Lecture by Dr YV Reddy, 24 June 2012, Basel, Switzerland. *  *  *  I would like to thank the BIS for the invitation to participate in this panel, which makes us look at financial markets from a new perspective. As policymakers, we are used to talking about how the financial system must operate in order to fulfill its goals without threatening financial stability or imposing costs at the aggregate level. In recent years, the discussion has focused on how to avoid excessive procyclicality, contagion, moral hazard, and other important policy concerns. As economists, we have been trying to explain the misbehavior of financial systems, and we are still searching for answers. Although we may have some ideas, the policy implications are not straightforward, but the answers cannot wait. Policy design needs answers as soon as possible, and delays may cause well intentioned policies to be poorly implemented. But what society really demands from financial systems is quite difficult to define. Society is a collection of actors, with different interests and different needs. People want access to the financial system at fair conditions. Therefore it is useful to think of society as everyone who is not related directly to the financial industry or policymaking.
Inflation expectations may be sensitive to a large but temporary shock that moved inflation outside the range within which it has remained for some years. With their belief in stability jolted, households’ inflation expectations might move by much more than was justified by the temporary nature of the shock. That would make it more difficult for the central bank to bring inflation back to target. The moral of this particular story is that it may be risky to infer from the observation that inflation expectations are stable that all is well. There will be times when large and persistent shocks occur, and it would be unwise to count on inflation expectations remaining stable when actual inflation starts to deviate substantially from its recent range. So those are the three lessons that I have learnt from Alan: (i) a recognition that economics is not a set of doctrines but a way of thinking; (ii) the importance of using qualitative and quantitative information from a range of sources; (iii) there are a small number of fundamental objectives that are crucial and which we can judge by the Greenspan yardstick of whether we have freed businesses and households from the burden of expending resources to deal with unnecessary policy volatility. Alan’s departure from the central banking scene will deprive us of a source of wisdom, inspiration and leadership. To be sure, Alan’s words, whether spoken or written, will surely still reach us from the sidelines.