 Good morning and welcome to Cintra to the fourth ECB forum on central banking After focusing on the future of the international monetary and financial architecture last year We are now turning to discussing Investment and growth in advanced economies So we are confident that the discussions will be rich and inspiring as they have been in the last three years given the current debate Before I give the floor to President Draghi for his introductory speech, I would like to clarify our media policy For the first time we will live webcast all the sessions in the forum So all the sessions are on the record and can be reported upon live All conversations with forum participants taking place on the sidelines of the forum are strictly off the record For those of you who are interested in joining the social media conversation We invite you to follow us via Twitter using the hashtag at ECB forum and without further ado Let me now give the floor to President Mario Draghi for many years after the financial crisis Economic performance was lackluster across advanced economies Now the global recovery is firming and broadening A key issue facing policy makers is ensuring that this nascent growth becomes sustainable Dynamic investment that drives stronger productivity growth is crucial for that and in turn for the eventual normalization of monetary policy Investment and productivity growth together Can unleash a virtuous Circle so that strong growth becomes durable and self-sustaining and Ultimately is no longer dependent on a sizable monetary policy stimulus The discussions we will have over the next two days in particular understanding the puzzles of slow in productivity growth and Persistently low investment are therefore highly relevant for the path of the economy and of our monetary policy Yet as we anticipate the problems of tomorrow we must also work on the issues of today For central banks, this means addressing an unusual situation We see growth above trend and well distributed across the euro area But inflation dynamics remain more muted than one would expect on the basis of output gap estimates and historical patterns and Accurate diagnosis of this apparent contradiction is crucial to delivery in the appropriate policy response and the diagnosis by and large is this Monetary policy is working to build up reflationary pressures But this process is being slowed by a combination of external price shocks More slack in the labor market and a change in relationship between slack and inflation The past period of low inflation is also perpetuating these dynamics These effects however are on the whole Temporary and should not cause inflation to deviate from its trend over the medium term So long as monetary policy continues to maintain the solid anchoring of inflation expectations Hence we can be confident that our policy is working and its full effects on inflation will gradually materialize But for that our policy needs to be persistent and We need to be prudent in how we adjust its parameters to improving economic conditions Understanding inflation dynamics requires us to divide up the inflation process into two legs The effect of monetary policy on aggregate demand and the effect of aggregate demand on inflation All the evidence suggests that the first leg is working well Though the euro area recovery started later than those in other advanced economies We have now enjoyed 16 straight quarters of growth With the dispersion of GDP and employment growth rates among countries falling to record low levels If one looks at the percentage of all sectors in all euro era countries that currently have positive growth the figure stood at 84% in the first quarter of 2017 well above its historical average of 74% Around 6.4 million jobs have been created in the euro area since the recovery began The role of monetary policy in this growth story is clear Since mid 2014 our monetary policy stance has been determined by the combination of three instruments first low policy rates second asset purchases in financial markets and targeted long-term refinancing operations for banks Reinforced by third forward guidance on both This has created strong downward pressure on financing costs With rates falling steeply across asset classes Maturities and countries as well as across different categories of borrowers Converging financing conditions have in turn fed into rising domestic demand According to our bank lending survey our latest easing phase Has coincided with a strong rebound in demand for consumer credit to purchase durable goods While demand for loans for fixed investment has gradually firmed At the same time following borrowing costs have reduced interest payment burdens and Facilitated the leveraging which is one reason why for virtually the first time since 1999 Spending has been rising while in-depthness has been falling This is a sign that the recovery may be becoming more sustainable Just to put our measures into context since January 2015 That is following the announcement of the expanded asset purchase program GDP has grown by three point six percent in the euro area That is a higher growth rate than in the same period of following QE one and QE two in the United States And a percentage point lower than the period after QE three Employment in the euro area has also reasoned by more than four million since we announced the expanded asset purchase program Comparable with both QE two and QE three in the United States and considerably higher than QE one For the monetary transmission process to work however Stronger growth and employment ought to translate into higher capacity utilization scarcity in production factors and in time Upward pressure on wages and prices and this is what we see The unemployment gap the difference between actual unemployment and the non-accelerating inflation rate of unemployment Is narrowing and is forecast by the Commission to close within the next two years Surveys of business capacity utilization are now above their long-term average levels and inflation is recovering between 2016 and 2019 we estimate that our monetary policy will have lifted inflation by 1.7 percentage points cumulatively Yet the second leg of the inflation process the transmission from rising demand to rising inflation Has been more subdued than in the past. How can this be explained? The link between output and inflation is determined by three main factors External shocks to prices the size of the output gap and its impact on inflation and the extent to which current inflation feeds into price and wage setting in Different ways each of these factors had been relevant for the delayed reaction of inflation to the recovery Starting with external factors one explanation for this low improvement in inflation dynamics Is that we are still suffering the after effects of price shocks in global energy and commodity markets Which have led output and inflation to move in different directions Inflation has indeed been subject to such shocks over recent years most notably the oil and commodity price collapse in 2014 and 2015 This not only depressed the cost of imported energy, but also lowered global producer prices more generally Is it be analysis suggests that the global component in the underperformance of euro area inflation in recent years was considerable? in 2015 and 16 Around two-thirds of the deviation of euro area headline inflation from a model based mean Can be accounted for by global shocks linked to oil prices Even though the downward pressure on inflation from past oil price falls is now waning Oil and commodity prices are still having a dragging effect If only because they continue to lack a clear upward trend in fact lower oil and food prices than those assumed in the March 2000 2017 projections are an important factor behind the downward revision of our latest inflation forecasts Oil related base effects are also the main driver of the considerable Volatility in headline inflation that we've seen and will be seeing in the euro area Falling import prices partly explains the subdued performance of core inflation to This is because imported consumer products account for around 15% of industrial goods in the euro area Likewise changes in commodity prices feed through into some service items and to Into industrial goods produced with high energy intensity as a result in the first quarter of 2017 oil Intensive items were still holding back core inflation This illustrates the core inflation doesn't always give us a clear reading of underlying inflation dynamics Global factors therefore do appear to be weighing on the path of inflation today But our analysis suggests that the drivers of low oil price at the present are mainly supply factors which a Central bank can typically look through and Even if supply factors affect the path of inflation for some time with inflation expectations Secure they should not ultimately affect the inflation trend a second explanation for the discrepancy between real developments and inflation is Uncertainty surrounding the size of the output gap and its impact on inflation This might be happening for a variety of reasons One possible reason is that we are currently experiencing positive supply developments In particular, we do observe that as the recovery strengthens the supply of labor is rising, too Labor force participation has been growing consistently over the last few years Boyed especially by increasing participation rates of older workers We also see some evidence that labor supply has become more elastic due to immigration particularly in strongly growing economies such as Germany Since 2007 the euro area participation rate has risen by around 1.5 percentage points whereas in the United States. It's fallen by more than three percentage points in the same period Structural reforms in labor markets have been a factor in this labor supply boost Similarly past reforms in product markets may also had a positive effect on the supply side By reducing price markups increasing productivity and raising growth potential Another reason why there is some uncertainty over slack is the correct notion of unemployment That is there may be residual slack in the labor market that is not being fully captured in the headline unemployment measures Unemployment in the euro area has risen during the crisis That's so too has the number of workers who are Underemployed meaning that they would like to work more hours or who have temporary jobs and want permanent ones This has implications for inflation dynamics since these people might prioritize More hours or job security over higher wages in employment negotiations If one uses a broader measure of labor markets lack Including the unemployed Underemployed and those marginally attached to the labor force the so-called u6 That measure currently covers 18% of the euro area labor force Phillips curve models that employ this measure appear to be more successful in predicting inflation a Third reason why slack might be larger is the effect of a so-called global slack This is the notion that globalization has made labor supply characteristics more uniform across the globe and labor markets more contestable Conditions in for in foreign labor markets to therefore have a dampening effect on domestic inflation Even as domestic slack is shrinking The evidence however is not clear cut for example new ECB Analysis finds only limited support for the thesis that global slack is weighing on euro area inflation today over and above The impact it has on global prices Along this along the question of the level of slack is the impact of slack on inflation This is the well-known debate on the slope of the Phillips curve There are indeed reasons to believe that wage and price setting behavior in the euro area Might have changed during the crisis in ways that slow the responsiveness of inflation For example structural reforms that have increased firm level wage bargaining May have made wages more flexible downwards, but not necessarily upwards Likewise, we see today that firms are absorbing input costs through lower margins due to uncertainty over future demand Which would also tend to temper price pressures Indeed ECB estimates show that if we take into account the unusually large and persistent shocks of the past years The Phillips curve for core inflation may well be somewhat flatter recently However, in so far as the slope of the Phillips curve depends non-linearly on the cyclical position It may steepen again when the economy reaches and surpasses full potential While these various reasons might delay the transmission of our monetary policy to prices that will not prevent it As the business cycle matures the higher demand resulting from positive supply developments will accelerate price pressures While firms price in power will increase and the broader measures of slack will converge towards the headline measures As shown in the United States the gap between the headline and employment rate and those broader measures Typically opens in recessions and shrinks in expansions Currently it is converging to the minimum levels recorded before the 2001 and 2007 recessions So just as for oil and commodity price shocks We can be reasonably confident that the forces we see weighing in on inflation are temporary So long as they do not feed more lastingly into the inflation dynamics This brings us to the third possible explanation for why growth might be diverging from inflation The hypothesis that a persistent period of low inflation is in fact feeding into price and wage setting in a more persistent way What is clear is that our monetary policy measures have been successful in avoiding a deflationary spiral and securing the anchoring of inflation expectations In the past as interest rates approached zero Some did question our ability to add sufficient accommodation to combat a prolonged period of too low inflation We answered those doubts by demonstrating that we would take any measures necessary within our mandate to deliver our mandate And that those measures were effective in further easing financial conditions Deflation risk premium which had been growing in 2014 and 15 have now become more or less priced out of the market based inflation expectations That being said, a prolonged period of low inflation is always likely to be exacerbated by backward-lookingness in wage and price formation That occurs due to institutional factors such as wage indexation And this has plainly happened in the euro area ECB analysis finds that compared with long-term averages, low-past inflation dragged down wage growth by around 0.25, 0.25 percentage points each year between 2014 and 2016 The evidence as to whether backward-lookingness has increased recently is mixed There were signs that indexation had fallen in the early part of the crisis And our empirical estimates suggest that the weight of past inflation in current inflation has decreased Yet there is also evidence that indexation has returned in some large euro era countries In Italy, for example, backward-looking indexation of wages now covers around one-third of private sector employees Still, even if indexation rose, it would only create inertia in price formation It would not obstruct the transmission process As economic slack shrinks, upward pressure on prices will materialize and gradually enter the indexation ratchet So once again we see temporary forces at work that should not affect median-term price stability And this assessment is broadly what we see in market-based inflation expectations today Interpreting with some caution, they are now consistent with the picture that our policy is effective But its full effects will take time to materialize So what do these various explanations imply for our monetary policy stance? The first point to make is that we face a very different situation today from the one we encountered three years ago Then we also faced global shocks and significant labor market slack The recovery was still in its infancy Global growth was lowing, depressing both import prices and net exports Fiscal policy was less supportive than it is now And headline inflation was much lower than today And inflation expectations were more fragile, creating a higher risk of low inflation becoming entrenched In this context, we faced another risk too A permanent damage to the economy through the so-called hysteresis effects Given the large degree of slack at the time, the risk was That if output remained below potential for too long, we would see a permanent destruction of productive capacity The output gap would close the wrong way, making the losses permanent When we said we wanted our policy to have effects without undue delay We meant we wanted the output gap to close upwards And before such hysteresis effects could develop This is why we had to act forcefully Now we can be confident that our policy is working and those risks have abated The threat of deflation is gone and reflationary forces are at play And since one of the drivers of inflation today is positive supply developments This should feed back positively into potential output rather than produce hysteresis In these conditions, we can be more assured about the return of inflation to our objective than we were a few years ago This more favorable balance of risk has been already reflected in our monetary policy stance Via the adjustments we made to our foreign guidance Another considerable change from three years ago is the clarification of the political outlook in the euro area For years, the euro area has lived under a cloud of uncertainty about where the necessary reforms would be implemented at both the domestic and the union levels This acted as a break on confidence and investment, which is tantamount to an implicit tightening of economic conditions Today, things have changed Political wins are becoming tale wins There is a newfound confidence in the reform process and a newfound support for European cohesion which could help unleash pent-up demand and investment Nevertheless, we are still in a situation of continuous lack and where a long period of sub-power inflation translates into a slower return of inflation to our objective Inflation dynamics are not yet durable and self-sustaining, so our monetary policy needs to be persistent This is why the Governing Council has repeatedly emphasized that a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and to support headline inflation in the medium term And this is reflected in our forward guidance on net asset purchases and interest rates, as well as our decision to reinvest the principal payments received under the APP, the asset purchase program, for as long as necessary With reflationary dynamics slowly taking hold, we now need to ensure that overall financing conditions continue to support that reflationary process until they are more durable and self-sustaining As the economy continues to recover, a constant policy stance will become more accommodative and the central bank can accompany the recovery by adjusting the parameters of its policy instruments, not in order to tighten the policy stance, but to keep it broadly unchanged But there is an important caveat that we need to consider Financing conditions are not only determined by the calibration of central bank instruments, but also by other market prices, some of which are significantly affected by global developments In the past, especially in times of global uncertainty, volatility in financial market prices has at times caused an unwarranted tightening of financial conditions, which has necessitated a monetary policy response So, in the current context where global uncertainties remain elevated, there are strong grounds for prudence in the adjustment of monetary policy parameters, even when accompanying the recovery Any adjustments to our policy, to our stance, have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure Let me conclude Our assessment of the outlook for inflation and monetary policy can be summed up in three messages The first is confidence, that monetary policy is effective and the transmission process will work All the signs now point to a strengthening and broadening recovery in the euro area The inflationary forces have been replaced by reflationary ones While there are still factors that are weighing on the path of inflation, at present there are mainly temporary factors that typically the central bank can look through However, a considerable degree of monetary accommodation is still needed for inflation dynamics to become durable and self-sustaining So, for us to be assured about the return of inflation to our objective, we need persistence in our monetary policy And finally, we need prudence As the economy picks up, we will need to be gradual when adjusting our policy parameters so as to ensure that our stimulus accompanies the recovery amid lingering uncertainties Thank you Thank you, President Draghi I would now like to draw your attention to the electronic posters by ten young economists selected amongst a number of applications that, like the last two years, will be on display in the foyer next door You are invited and encouraged to take a look at them and to discuss them with the students and then to place your rating via the iPads The results of the rating will be evaluated together with the assessment of the selection committee It's important because the winner will be awarded a prize at the end of the conference tomorrow, so we do need your opinion Let's see who the selected students are and their main issues present in their papers and we will now play a short video to introduce them Micro data to study the employment effect of credit shocks We find that credit matters for the accumulation of human capital in firms GDP fell 15% behind trend in the aftermath of the global financial crisis I provide causal evidence that the crisis led to a sharp reduction in R&D This led to a slowdown of productivity growth, which explains a third in the shortfall of output today The fiscal policy response to the financial crisis in the United States included both conventional stimulus and financial sector interventions I study these response by combining data and the structural macro model and find that tools such as transfers to households and bank recapalizations were the most effective Many countries are engaged in fiscal consolidation due to rising government debt Structurally, tax increases appear to be safe to feeding and deliver a higher debt ratio Instead, expenditure cuts have a less pronounced effect on specific growth and are able to stabilize debt Leasing disinflation and slow recovery are two features of the Grated Session that are hard to address with standard macroeconomic models By allowing for an explicit role for inflation expectations, I demonstrate that the interaction between expectations and policy is a key determinant of macro outcomes I revisit the Mendelian idea that labor mobility is an important stabilizing force in a currency union Empirically, I show that housing markets overturn this result, implying that migration amplifies local shocks and increases regional inequality Central counterparties are systemically important, but many of them operate as profit-driven firms which create potential conflict between private incentives and public interest My model suggests to have different capital regulation for central counterparties with different ownership structures I document large increases in external financing, investment and employment due to the EU's financial services action plan These findings have important policy implications for the capital markets union and the Brexit negotiations The credit booms we experienced in recent decades were associated with investment in low-productivity sectors of the economy such as housing I will show how these factors misallocation can be explained by the emergence and not the burst of a rational credit bubble In our paper we show theoretically and empirically that increased financial frictions can lead to anti-competitive effects hindering the reallocation process usually ensuing after a crisis