 Thank you. Thank you, Christine. Thank you, Mario, and thank you, Benoit. So it's a pleasure and it's an honor to be here for Benoit's farewell conference and before we get into serious matters, I would like to share with you a few personal thoughts about Benoit. So Benoit is what we call in French a humanist. He combines the highest scientific formation with the widest appetite for literature. I'm sure most people could not recognize the authors that were on their name table yesterday. He speaks Japanese, he climbs mountains, he smokes cigars, he loves opera, he writes books, he will do another one with his speeches here, he collects art, but above all Benoit is a truly faithful and generous friend as you can all testify here. And I think on top of this, he has the unique quality of having always combined freedom and responsibility in his professional life. So Benoit, you're only in the middle of your career and as we discussed many times, you've barely reached your productivity peak since, as you know, the 50s is the new 40s. And given what you have achieved in barely 20 years, I'm not sure we have enough imagination to picture what you will do over the next 21. Now, as you often say, there's no free lunch or rather dinner. So we're here to talk about the role of the bond markets in the conduct of monetary policy. As Mario just alluded, bond markets provide indicators of financial condition, inflation expectations and perception of risks. And these indicators are based on the analysis of the current and future economic outlook, the understanding of central bank economic views and reaction function. These financial conditions therefore deepen significantly on the quality of communication between central banks and markets. So now communication has not always been permanent among central bankers and I will read you a little extract from a discussion between Keynes and Harvey, who was deputy governor of the Bank of England. Hi, John, in 1929. So Keynes, is it a practice of the Bank of England never to explain what its policy is? Harvey. Well, I think it has been our practice to leave our actions to explain our policy. Keynes, are the reasons for its policy? Harvey, or it's a dangerous thing to start giving reasons. Keynes, are to defend itself against criticism? Harvey's. As we got criticism, I'm afraid. So the committee may not all agree. We do not admit here there is a need for defense. To defend ourselves is somewhat akin to a lady starting to defend her virtue. Now modern central bankers have moved way beyond this and communicate through policy statements and press conferences and economic forecasts, official reports, speeches, interviews, testimonies before public bodies. You might argue this is too much. However, the better markets understand how the central bank will react to the state of the economy to enforce an event, the better they anticipate policy action. In an optimal world, condition in financial markets should timely and gradually tighten or loosen as economic news suggests changes in the economic state of the world, anticipating the central bank reaction. And this is particularly relevant in the post-crisis unconventional monetary policy world we are living in today. So because it is Benoit, we have to cite the quote a lot of academics and I will start with one which is a Gertzner and Woodford in 2003 who have demonstrated that effective communication is especially powerful in a global environment of low nominal rates and reduced policy space because it can reduce the size of central bank interventions required to achieve desired financial condition. Effective communication may be also particularly important when there are a lot of risk accumulated in markets. In that case, central banks may wish to minimize volatility when financial market adjusts to changes in economic condition and therefore monetary policy action. There are also reasons to worry about excess communication. And that has to do in a way with the personal nature of monetary policy and financial market dialogue. Now, as Jeremy Heer and Yoon Shin Heer expressed in previous occasion, the market is not a single person and the central bank committee is not a single person either. But markets can only adjust in line with central bank expectations if they understand correctly. The signal sent by the central bank persons. There also must be a certain degree of latitude so that both financial market and central banks can adjust to the state of the economy without triggering large movements of volatility that would destabilize financial conditions and in turn the real economy. So all together too much information, especially when there are different opinions coming from one committee, may result in conflicting signals about the policy path, the famous blind-air, second quote, 2007 cacophony of voices and that may increase uncertainty for markets and private agents. But there is an additional concern about communication, which is that it goes both way and I'm sorry to quote you a second time. But as you said before, there is the talking part and there is the listening part. So that if central bank took more to influence market prices, there may be an argument that they should perhaps listen less to signals emanating from the same markets. And I quote you in a NECO, otherwise the central banks can't find themselves in the NECO chamber of their own making, acting on signals that are echoes of their own pronouncement. And even more monetary policy relies on an influence market signal, so the circularity between monetary policy and market reactions may amplify a bad signal. And this can in turn unduly constrain policy action. If the central bank fears that when it deviates from market expectation, it will create strong volatility. So perhaps this is what Benoit wanted to signal with his session today, if we can take any clue from one of his 180 or so speeches in Bergogne in 2017, where he quoted Paul Samuelson, who famously compared the central banker who reads too much from movements in the bond market, to a monkey who discovers his reflection in the mirror and thinks that by looking at the reactions of that monkey, including its surprises, he's getting new information. However, one could argue that central banks always have the opportunity to look at an extended set of signals way beyond the bond market. And this is the last point I will make because you're here to listen to Elaine, Charles and Jeremy. Obviously the clearest forward guidance would be a fully transparent algorithm that relates interest rates to economic data. But today such a mechanical reaction function only exists in economic models, and policy makers have to use their judgment, manage their decision, and that's inherently uncertain. Benoit, you may be working on such an algorithm in your future life, but in the meantime, I think we have to leave Jeremy, Charles and Elaine, debate the dialogue between central banks and markets, and hopefully disentangle what is the reality of this dialogue from the mythological part, Marvin Guthrie analyzed. Thank you. Okay, well, first thanks. Thanks very much, Lawrence. And it's just a privilege to be a part of honoring Benoit for his extraordinary public service. And I just want to thank him personally for the example he set for how to combine the best economic thinking with a deep understanding of markets and institutions, and really principled policymaking. It's been an honor to watch and to learn from our interaction, so thank you. Thank you, Benoit. So what I thought I would do is touch on one particular aspect of the panel's topic, namely the consequences and potentially the dysfunctional consequences of central banks being overly attentive to how markets receive their words and actions. And I'm going to try and speak specifically to the monkey in the mirror issues that Lawrence just flagged. So, let's see, the slides got a little cut off here. So, you know, when I first came to the Fed, I have to say one of the things that was most surprising to me was this. So, of course, I understood that the markets pay enormous attention, not only to the actions, but to every word, to how the statement is being changed to all that. I understood that. What I didn't fully appreciate was the other side of this monkey feedback loop was just how attentive the Fed, and I think central banks in general, are to what the market is thinking about what they're thinking. And so one of the things that struck me as particularly odd about our practice, I don't know if it's exactly the same at the ECB, is at the beginning of every FOMC meeting, the first thing we would have is a report from the desk in New York and they've done a survey of market participants and the market participants tell us what they think we're going to do. So, you know, during the bond buying era, there would be a survey that says what are the probability you attach to the likelihood that the Fed will taper asset purchases at this meeting. Market participants would say it's highly unlikely, you know, 5% probability, and then you sometimes felt like QED. You know, this is, they've decided we're not going to taper at this meeting. Then obviously, if we taper at this meeting, we'll have shocked the market and that's a bad, and so, you know, that's, again, something that struck me as odd. And, you know, in the year since, I've tried to think about it a little bit more formally. I've done some modeling work and, you know, if you think about it, the sort of two key ingredients in thinking about this problem are, one, you have to believe that the Fed has some information about its own intentions, its own actions. That sort of just means that the market reacts to the Fed. I should say the central bank, excuse me. And second, that there is a concern, and this is where, you know, we get into kind of the difficult thing, that there is a concern on the part of the central bank with the market volatility response to its words and actions. And if I could leave you with one sort of overarching idea from this, it's that mix of ingredients gives rise to a time consistency problem. Everybody in this room is familiar with the idea of time consistency problems in central banking, typically around inflation. And we sort of understand the idea of pre-commitment or of culture in the sense of, you know, you know that when you become a central banker, you're supposed to hate inflation, right? Because what we've learned from this time consistency problem is you actually get a better outcome in terms of both inflation and output or inflation and unemployment if you commit yourself or if you build a culture that is particularly worried about inflation. Okay? What I think is less appreciated is a somewhat analogous time consistency problem, which is even if there is some legitimate reason to care about the market, it can be important to build a culture around or a set of norms around not behaving as if you're too worried about the market response to your words and actions. So that's the basic idea. And the flip side of that is if you are too sensitive to the market, you can get a variety of sort of dysfunctional outcomes. So I'll try to mention a couple. One is this well-known idea of gradualism and monetary policy where even when the world changes, when fundamentals change, the central bank often wants to move in very, very small steps. But there are other examples, one being sort of this being led by the market phenomenon that Laurent also alluded to where market sentiment shifts and basically or market expectations about the central bank shift and the central bank in order not to disappoint the market feels like it has to go along where there's some, and that's the thing I felt quite keenly myself, some loss of agency in terms of your policy because you're being led by the market. So here's just a dopey thing you can do with the transcripts. This is just a little exercise we did where we counted, very, very simple thing. We counted the number of times in the transcripts people alluded to financial markets, said words like bond market or bond market volatility, and then just divided by the total number of words in the transcript. And you can sort of see the pattern. Obviously it goes up and down, not surprisingly at all, around the financial crisis people are talking about financial markets a lot. But even if you filter out these sort of ups and downs, there's a very strong time trend here that basically this fitted value, the red line, goes up by a factor of something like five. So the idea that central bankers are not only concerned but have become more concerned in recent years with market seems to be there in a very, very crude cut at the data. As I said, you know, it's a very well-known fact that the funds, you know, that policy rates adjust relatively inertially to changes in what you might think are the sort of fundamental targets. You know, here's a picture of the funds rate during a hiking cycle. You know, what if they went 17 times in the same direction? You sort of kind of knew where they were going, but they somehow wanted to get there slowly. We have a quote here from Alan Greenspan, which basically kind of captures, I think, the intuition. We don't want to create discontinuous movements in asset prices. But note the sort of conundrum here or the paradox. It's just like companies that smooth their earnings. They think, oh, if we have smooth earnings, we won't have a volatile stock price. But of course, the market comes to understand that you're smoothing your earnings. So then if you miss your earnings target by even a penny, it becomes a big deal. Same thing, the market understands that you're moving gradually. So then everything you do is freighted with significance. Even if you don't move at all, but you change the statement, that in itself becomes a thing. And so it's hard to make the volatility go away. And at the end of the day, what you're left with is very gradual adjustment, but probably not a whole lot less market volatility, just greater market sensitivity to a given small movement. And maybe, as in the case with this sort of very... The policy rate is just not really where you want to be. You've sort of smoothed. You haven't really accomplished anything, but you've ended up a little bit further than where you want to be. So again, that's just one example of something that can happen when you're too focused on markets. But there are others. We talk so much about data dependence. And at some level, it's like motherhood and apple pie. How can you not want to be data dependent? But I think sometimes in this sort of loop with the market, you can get a particular kind of data dependence, which seems a little odd and a little dysfunctional, which is an obsession with the most recent number. And again, everybody in this room has probably seen or felt some example of this. But the one that sort of left an impact on me is, we'd be kind of running up to a meeting and there was kind of a default decision, maybe we'll taper at this meeting or maybe we'll raise rates. But the market somehow gets it in its head that the central bank is very data dependent and boy, the payroll number that comes out on the Friday before the meeting is a big deal and the market's conjecture in some sense is if that payroll number is not good, where good means something like 200,000, they're going to step back and not do it at this meeting. Then you find yourself praying to the god of measurement error and say, boy, I hope we don't get a flaky number because it's self-validating. We had one of these where I think we were about to taper. This is September of 2013 I think and we're basically set to go and the number comes out and the number is not 200, maybe it was like 170 or something like that. And of course you know and I know and we all know that there's no meaningful difference between 170 and 200 in one number. But if the market thinks that's your rule and now the market going into the meeting is thinking they're not going to do it and you know the evidence is and Goldman Sachs has produced this kind of research very, very unusual for the Fed to make a tightening move that is not fully baked into market expectations at the time. So what do you get? The market's conjecture in some sense is validated. They hold fire when the number is a little disappointing. So one response to this is, I think one thing that's constructive, the problem here is if meetings are always kind of a jump ball, if it's always just hanging in the balance, that's when it's most freighted with informational content. So the problem, the sort of theory would tell you you want to take some of the informational content out. So in some cases you can't always do this, but in some cases to the extent that it's possible to have a default presumption. So what I mean is it's not hanging exactly in the balance, but sort of there's an expectation that as long as the data is broadly between say the 25th and the 75th percentile, this is what we're going to do. That makes it easier to implement the policy. So a particular example is, again, when the Fed first started thinking about tapering, it was just an enormous big deal. There was the taper tantrum, every little signal was a big deal. Then we sort of happened our way into something which I think was maybe a little inverting, but was helpful, which is that the assumption started to be that once we started to taper, that at every meeting afterwards we were going to do $10 billion more. Well, of course unless something dramatic happened, but that was sort of a notion that for a broad set of outcomes we would kind of do this $10 billion a meeting. Well then when you do it, there's no information content, so it's easy to do. Similarly, sometimes in a hiking cycle, you can find yourself in a situation where you can create a default, which is as long as nothing too dramatic happens, and that's helpful. Whereas if you set each meeting up as the super data dependent thing, you can get yourself, I think, a little bit trapped. And it's just something that comes out of this way thinking that the underlying problem is this kind of market inference about your private information and then what you want to do is in some sense take some information content out. Last... Okay, I guess I should... Okay. One minute? One minute. Okay, so let me just say the one sort of tension in this that is sort of very apparent that I'm sort of very aware of and I'm a believer, I know a lot of other people in this room are believers that at some low frequency, at some low frequency, we should pay attention to financial conditions. That is to say if financial conditions are tighter this year than they were last year, we should have an easier policy setting. And at the same time I guess I'm trying to say we should really try to create a culture and a set of norms where we don't worry too much about the short run impact on markets. Now you might say that those things are at least partially in contradiction and in a random walk world after all, the long run is just the sum of a bunch of short runs. So how can you believe both of these things? There is some tension. I will say that tension is mitigated to the extent that the market impact of a policy announcement is somewhat transitory and the recent evidence is somewhat consistent with that. So it makes it a little easier to say I'm not going to be overly concerned with market impact because often the market impact of a Fed announcement is revert away in the sort of six to nine months afterwards. Thanks. Thanks. Thanks. I'm sorry we had to cut you off. Sorry, sorry. When you were about to give some insight on the table, 10 from, but we'll come back to this. And I think Charles is supposed to offer a little contradictory view to Jeremy. All right. Well it's a great privilege and a great pleasure to be here today to honor the work that Benua has been doing here. Lots of people are claiming to have known him for a long time. I probably knew him for longer than most people. I knew him when he was a graduate student in Paris. And he was not just a good graduate student, he was an unusually good and unusual person. I don't know how many people know it, but he speaks and reads, at the time he used to speak and read in Japanese. For a young graduate student in economics, it was unusual. And I also discovered one morning when he came to visit us in my home that he can draw beautifully well. He has a talent for that and probably a training. And of course he was unusually thoughtful. It's been a pleasure for me all over this year to follow his blossoming. And his blossoming was actually successive transformations. He went to work, of course, in the Treasury where he held a different position. And each time I discovered somebody getting bigger and more thoughtful. And of course when he came to the ECB he was another new life for him. And he's done obviously very well. I've been wondering why has he been so successful in everything he's done? Well, of course he's good and he's well trained. But that we all know. But I think what is unusual is the degree to which he takes science seriously. He just reads everything and he thinks very hard about it and then he comes to his conclusion. And again Mario mentioned the many speeches that he has been giving over the time. I've been addicted to these speeches not just because he mentions everything that I haven't read. So I feel I have read them after he talks about it. But also each one of them has a little personal touch and a useful contribution and an idea that obviously I didn't have before. So very, very successful. And it's a pleasure. We were discussing about jokes, about Beno. Actually it's very hard to remember jokes. He's full of humor and about lots of things. But he doesn't open himself up easily to humorous remarks. So I won't go into more private things. I just stay here. Now on the topic of today we have to be a little bit serious. Again, this is a topic as Mario mentioned earlier that Beno has been thinking very hard and made some very interesting contributions. So I've been asked to discuss that and I feel humbled. This is one of the many cases where the student is better than the teacher. So I'll try to do a little bit of provocation following on many of the things that Jeremy has said. And you'll cut me off when I've reached one-tenth of my presentation. Now, okay, there is this hypothesis that monetary policy has been important. Of course that's the provocation because you don't come in this house and make this statement. That's certainly not what is the rule of the house. Now, still, there is this huge paradox that we all know that how the saddle banks have solved the world after the crisis and ever since for the last 10 years they seem to be unable to bring inflation to a very moderate level. And that was supposed to be the easiest thing and at least I've been in this generation who thought the problem is not to raise price inflation but to keep it from exploding. So why do we have that? And that's where I'll link up with the financial market. We had these slow for long interest rates and there are a number of discussions about this creating distortions. It was mentioned before that there is this hypothesis that there is a reversal rate and the reversal rates may be creeping up over time. So it may be around the corner now. There is this view that QE doesn't work anymore because there is so much liquidity because of all these distortions. And there is this view. So low or negative interest rates, QE and forward guidance were the big non-standard contributions of the last 10 years and now there is this view. None of these things are helpful anymore. And then there is this view that forward guidance is just not anchoring anymore inflation expectations. So we have all these assumptions which are being discussed and what I want to do is to link it with the financial markets a little bit. My perception, I'm surely wrong, is that financial markets like the current situation of QE and forward guidance and low interest rates, low interest rates are not for banks maybe but for financial markets are mostly good news. Low borrowing costs, great asset valuations, so more the value of funds under management is very high. QE, lots of liquidity to absorb and take care of so it's good business. And forward guidance is great because it limits market uncertainty, which is what markets hate. So maybe in a way what is troubled for a central bank is mostly good news for financial markets. That's sort of my provocation. Now the question is it's maybe too good to give up so do the financial markets hold the central banks captive? And in a way Jeremy has already developed the argument saying yes sometimes we, talking when he was in a central banker, we may get scared of rowing against the tide of the market. Now here this Jeremy has said this is the part about expectations so I'll save time and get a bit later by just saying there are a number of ways in which markets influence central banks and therefore central banks and there's also something Mario said central banks will try to shape expectations. Now expectations, what I think is amazing how markets get it totally wrong most of the time. Not all of the time but most of the time. This is about the US, the Fed. You have the interest rates and you have expectations over time extracted from financial market prices. Not all the time but very often markets just get it awfully wrong. That's about the policy rate. Here about inflation and that's a picture told from Benoit himself. This is inflationary expectations so the previous one was interest rates. This is inflationary expectations in Europe and so you have the actual inflation rate and in red and in green you have market expectations. Again in presenting this figure Benoit was right in saying we at the ECB also get it wrong often so it's not just blaming the market. The point and I don't want to blame anybody the point I want to make here is that all these communication strategies trying to improve the perceptions of the markets which in turn may be forcing the hand sometimes of central banks and it's just amazing the amount of mistake that's built up in these expectations and then if you buy the argument this is influencing the central bank there's something to be worried about. This is another thing about market expectations about interest rates in the Eurozone following the September decision. I don't know if the central bankers here have seen that this is scary. The market expect that by next July 58% of market perception is that the interest rate will be minus 0.7%. It will be lowered to minus 0.7%. So there is this pressure majority of markets expecting things. We know it's wrong but then the central bank has to think about it and the market is pretty insistent in its own expectations. So here I picked up the financial times just before the historical meeting of the ECB governing council in September 2009 and so this is an illustration of the kind of pressure that I perceive central bankers are on and Jeremy sort of accepted that. So ECB's Draghi faces up to supercharged market expectations just a kind of warning and then there's lots of interviews of financial market participants they must be important enough to be quoted by the FT so one says QE infinity is beyond what the market wants. I think people have both these bonds because they expect to be able to sell them to the central bank so that's what I think the market wanted to... a statement about the market wanted to see. You could see a market tantrum once the significance of that sinks in. It's another one but it's a warning. If you don't do what we want you'll see a market tantrum and then there is a clear risk that there could be disappointment so they are a bit realistic. If there is no discussion or mention of the issue of limits QE limits the market will take that very negatively. So here is the warning and then the poor guys meet and they have to make a completely independent decision. So clearly time. Okay then if it's time if it's time I just want to go to... Well I want to pick up one issue about the ECB if I may. So under this pressure what I was going to say is that under this pressure of course this affects communications these occasionally affect decisions. I want to go back to one aspect of the ECB just because there will be a strategy review I want to mention something. When the treaty says that the governing council is decided by voting as far as I can understand it never votes. So the idea is consensus and so on and so forth and one reason for that is of course is fear of markets. This idea of cacophony so if we start saying we don't disagree I think there is something deeply wrong with that given that the markets are never happy enough and never convinced enough I think there is some serious thinking to be done about having frank discussions having votes and even statements that don't disagree the market. I mean essentially what Jeremy was saying the more you give information to the market the next tiny bit of information will be exploited the signal extraction there may be some room of giving more uncertainty to the market because that's the way the world is and it may be helpful. Now, oops, yeah the last thing I wanted to say I think we should give the first question afterwards to the market because some of it is there. Elaine, please. Thanks a lot, it's a great privilege to be here today and it's been a great privilege to discuss economics with Benoit over the years. Benoit has had a lot of involvement with the academic community and I know it's going to sound very self-serving but I do think it's a good thing. I benefited greatly from his insights with speeches over short talks about long discussions such as last summer when Benoit and I and a few other people in this room were lost for many hours in the woods around the Jackson Hall and had the chance to talk about deep matters and as the sun was going down nobody panicked and certainly not Benoit. So I'm going to take a little bit of a different perspective here on the topic so my two friends here on the panel have talked a lot about the effect on market on central bank behavior and I'm going to look more at the central bank monetary policy effect on market risk aversion and I will look at that mainly through the idea that central banks affect risk aversion in particular through the effect they have on financial intermediation so that's going to be my angle and I will look at the international aspect mainly because that's what I've been doing some research about. So if we look at the effect of the Fed tightening this is well known now on global risk aversion in market so you see here 100 basis point tightening this has the effect of appreciating the dollar that's the first panel decreasing risk asset prices around the world that's the second panel and increasing global risk aversion that's the third panel to give you an order of magnitude this global factor decrease corresponds to roughly 10 points decrease in a broad stock market indices so these are big effects now if you look at very different measures of risk aversion they tell broadly the same story so if we look at the effect of the tightening directly on the VIX this is the first panel you see it goes up on impact you see that these various other measures of risk aversion go up on impact essentially when there is monetary policy tightening now of course this interaction between monetary policy liquidity and risk aversion is a topic that has been of interest for a while and as a matter of fact the first speech that Benoit gave in 2012 was precisely about these issues so I'm quoting here the possibility of credit liquidity is documented we have a strong interaction of private liquidity and the global risk appetite of financial institutions indeed the global risk appetite is one of the main determinants of a multiplier that links level of overall liquidity to levels of official liquidity there is a self-reinforcing interaction between risk appetite and liquidity so that was 2012 so of course then Benoit moved on to do these 174 other speeches on many different topics I got stuck on these things for like the next 5 years or 6 years working on these issues and so what are the effects that we can think about what are the mechanisms linking liquidity and monetary policy to these risk aversion measures of the markets and how do they work so I think that two main channels here the balance sheet effect which is for example discussed by Andrew Croquet in 2001 simply about the fact that when the interest rate is low asset valuations look good so all the balance sheets look good so in turn this stimulates more liquidity creation more credit creation and that increase valuations further and that's a kind of reinforcing effect on financial markets here I think there's also another effect which is so the balance sheet effect can be thought about more like an intensive margin effect there's another effect which is a composition effect in the financial sector so the risk of mistaking intermediaries actually may take more or less prominence over time depending on macroeconomic conditions on regulatory conditions depending in particular also on the level of interest rate and by being the marginal prices of assets in various markets they are the ones who can shape the time variation in global risk aversion so there's a composition effect there that means that in both cases whether you think of it as a balance sheet effect of a composition effect actually the fact that asset pricing is to a large extent I think due to financial intermediation that means that asset prices are going to be very influenced by the characteristics of intermediaries which are prominent in the market whether they are insurance or asset managers or whether they are banks it's going to matter whether their value at risk constraints is very tightened or not regulatory issues that's going to matter and on this set of financial intermediary asset pricing ideas there's very interesting new work done by Ralph Kojian and Motoyogo for example we have analyzed very granular data to give us some insight about the effect of these different financial intermediaries on asset pricing now how does that play out well for example in the past if we look back at these years 2003 and 2007 so there's a case to be made that risk aversion was very much shaped by the rise and fall of global banks here you see the influence of banking flows this is a dark blue and cross border flow you see that there is a lot of volatility coming from these flows and that global banks were really becoming important up to the crisis now if they are relatively risk takers that's going to shape risk aversion the market is going to be less risk averse during those years and this is I think probably this contributed to the build up of risk in the global economy these days if asset managers are becoming more important then it's going to be more important to study the institutional constraints of asset managers now within banks I'm just going to show you here a little it's almost like a cartoon I'm going to show you so you see on the vertical axis you have leverage of banks this is taken from the bank scope data so this is all monetary and financial institutions on the horizontal axis you have asset quantiles so if you go to the right these are the big banks and to the left these are the smaller ones and this is going to be year by year so the distribution of leverage by asset quantiles each point is about 30 banks so you see bigger banks tend to be more leveraged that's the first information of this thing but what is interesting is the time variation so wait Benoit so look at it so this is 2003 2004, this is the same scale on the vertical axis 2005 2006 so you see this queerness going up on the right tail so you see the increase in market share in a way of what I would say the most risk-taking intermediary so this is the time variation in this and this is related to the fact that when there is a boom the more risk-taking players tend to actually increase their market share and then they are going to price asset more and this is the connection with with the global risk-aversion after the crisis I'm going to show you just two years we tend to go down and this is due to the conditions but also it's due to re-regulation so okay now how does that again in a more broad setting so if we think about the transmission of US monetary policy to the global economy so I extracted here a few panels from the VR but I would like you to focus on these two ones again it's a it's a Fed tightening and look at the effect of a Fed tightening on the world financial conditions or the global factor in asset prices very strong so the transmission through financial markets of the Fed seems to be pretty strong which I haven't underlined is the world trade there is an effect on world trade as well but we are going to compare that with the People's Bank of China international monetary policy transmission which is some ongoing work I'm looking at right now and there what is interesting is that if you have a tightening of the People's Bank of China the world financial conditions or the global factor certainly on impact they don't move okay so it's not a transmission via financial markets it looks like okay everything you know it's work that I'm currently doing that's what we see but however where the People's Bank of China seems to have a big impact is the world trade right and the world production so it's more of a real transmission side here so this means there is this heterogeneity in international transmission channels of monetary policy on the other hand it looks like we look more at the global financial cycle but also some effects on the trade cycle from the People's Bank of China it looks much more on the real side and on the trade side now this is important because these are very different types of spillovers right so on the one side you have spillovers through asset pricing spreads and therefore this has to do with possibly with financial stability issues etc on the other side you have terms of trade commodity prices this also will lead to wealth transfers which can be very important and to disruption in the pattern of capital flows as well that may play out later but on impact the financial variables are moving mostly it seems because of the Fed so to conclude because I'm at the end I think of course the next step which is going to be fascinating is to study the style of the ECB in terms of international transmission so to some extent the euro area is a little bit in between the Fed and the People's Bank of China in the sense that euro area capital markets are still underdeveloped compared to the US one the international world of the euro is still limited compared to the dollar however the EU is a trading power a big one euro invoicing is a little bit less important than dollar invoicing so it will be very interesting to see how it plays out in these various types of potential spillovers from the ECB so one can study this using similar methodologies which you know I'm hoping many people will try to do that and I will certainly try as well but I would like to end by citing Benoit again in a recent speech at the Paris School of Economics where he said first uncertainty is a pervasive feature of our profession second perhaps the defining challenge for our profession is that our understanding of the economy is never settled and third there are no settled answers to applied questions so because of that I'm not going to conclude anything Thanks and thanks for being so respectful of time this is a perfect transition with what I was thinking about Charles' presentation isn't it that just we economists always get it wrong I think that was a perfect demonstration I have a lot of questions I think it would be better if we get somebody from financial markets to react to what we've been saying they usually are not so shy if I may okay, Jean that's a lie there we are firstly I really welcome Jeremy Stein's remarks I mean I think it's from someone who has watched, interacted, transacted in markets for 25 years starting in 1994 when one of the first big Fed shocks hit the market I think the markets have become overly dependent on central bank communication now I feel like markets have been led to the trough but there is a sense of too much certainty central banks wanting so much certainty that it reinforces market imbalances so I don't really I would probably push back against Charles' let's say I would add a nuance of Charles' comments which is the market does get it wrong very often but I think that's partly because we're trying to follow central bank communication so closely now that's not necessarily a criticism it's just the point that to the extent that the central banks have focused so intensively on making communication clearer that's coincided with what one might call the fall of theory and the increasing disagreement around different aspects of monetary policy and economic theory so think about the discussion about stock versus flow of QE very active discussion in markets which matters more markets I would say tend to focus more on the flow many central banks focus more on the stock same on the reversal rate some would not distinguish between the reversal rate and negative interest rate policy more generally so the point is when you have that disconnect between what people agree on from a theoretical perspective and central bank efforts to try to be as clear as possible about the communication ironically it actually creates it can create more misunderstanding the other point I would note is that turning points I think are very risky the point about short term tightening and financial conditions and whether or not central banks should look through those I would generally say they should and it's not necessarily that harmful but again it's part of that question of cost benefit tradeoff in terms of they end up with a much faster than desirable mean reversion or over correction of imbalances that are built up over the cycle and I think that that then feeds back to a point which is not fully appreciated in markets that you know policy is not only kind of adding or reducing accommodation but it's increasing or reducing volatility and so those turning points where you've gone through a cycle of suppressing volatility often by design you know it can be very tricky when you hit a turning point and that's where I think the addition of additional tools to the monetary policy toolkit all the macro potential tools can hopefully make that transition a little bit easier and make it easier for central banks to not be so paranoid about tightening and financial conditions that comes from unexpected policy moves thank you shall we get to our three questions and then you can answer it's not because we've been praising Benoit's intellectual capacity that nobody can raise a hand for a question Olivier, Olivier I was struck by Jeremy's remark that if you move in small steps then the reaction of a market is going to be bigger and there seems to be an invariance theorem there the implication is well, if this is right is the inertial degree of inertia of the rule that the Fed for example seems to be following the right one, should it not move much faster I've always been puzzled as to why the adjustment was so slow but your argument suggests that it is indeed too slow would you agree with that or not Pierre I'd like to come back to what Charles said because there's another focus on uncertainty which comes from the communication of central banks but I guess there is also at the same time more and more uncertainty about the efficacy of policies so on the split between uncertainty from one side which is communication and certainly from the impact of policy my guess would be there is more of the second part of kind and what does it imply for communication I have a question for Jeremy as central banks have tended the last ten years to mitigate aggressively and forward guidance but reality and real world is more volatile than their own communication meaning the data depending on the reality you keep on having events they have a narrative which is very smooth so I was interested to see how markets keep on forecasting it's always a smooth line of upwards sloping like a hill in reality it's like a cliff edge up and down so do you believe that actually central banks they keep on having a very smooth narrative as if they could see in the future which they know because nobody can in reality are creating more instability because if you suppress a real volatility when you get shocked I think that we'll move to answer I think we're missing one question about the financial condition and the communication but we're not talking about the channel of transmission between those financial conditions and the real economy and to what extent the ECB actually has managed to imperse the real economy and I think Elaine you went through the mechanism of transmission so perhaps you could give us the sense of how successful or how impaired or why are we not seeing this financial condition being transmitted to the real economy and has it got to do with this feedback loop between the market and the central banks who wants to start perhaps we should start with Charles okay I'll pick up on the way you just said because I can add the little thing I didn't have the time to say the in the discussion of whether of why monetary policies seem to be a serious question to have such a hard time to affect inflation there have been discussions over for the last 10 years and hypothesis of the hypothesis has been tried and then proven wrong the Phillips curve disappearance and all of that more recently my understanding of the discussion is about inflationary expectations how sluggish they are how unanchored they are and there is a lot of very interesting work by Gorodzicenko and Kwebio and others where they look at expectations inflationary expectations in markets and in the non-market private economy and what they find is that well you've seen how wrong the markets are occasionally and the private sector is completely wrong about the level of inflation but the private sector is pretty good at forecasting the direction up or down and I think there is a deep implication is that it's the private sector non-financial private sector that set prices and they are amenable to absorbing information from central banks for any information but they don't get it because central banks talk a lot to financial markets in a jargon that most non-financial people can't understand and there is a strong point I think to be made and that's where I wanted to end up for central banks to talk to the private sector to employees, employers who said at the end of the day they want to communicate what the central bank sees coming and is trying to achieve so that's sort of an important aspect and on Pierre's question yes, if there is a doubt about effectiveness of policy then that's also something that central banks should address more openly than I think is currently the case Thanks You want to follow up? I had on this very interesting work that indeed Koibion and Goli Cienko have been doing with expectations and server expectations of people, households and companies so this is very different from market expectations and indeed what is you could even say almost shocking is that in their data at least people have a lot of people really do not understand at all even the objective function of the central bank that is to say a lot of people do not know where is the target and do not know what the target is and a lot of people would really think that there are inflation rates which are 10% whatever there's a huge distribution of people making very large errors on basic facts so if we think that's going to matter for the transmission channel I mean we can discuss it because you know financial intermediation and types of expectations but that's a key issue and that means there is a failure of central bank communication and there's also lab experiments showing that expectations to affect the way people perform expectations one thing to emphasize is to do repeated simple messages with a basic facts so that could be something to explore more I mean I don't know but that's clearly an issue where things stand and now on the other point or you want me to delay and to let Jeremy answer because it's more on this topic of yeah perhaps let's do that also I think what would be nice as a conclusion because we need to conclude shortly is if each of you had just had one sentence for the monetary policy review where you think that the ECB should look into so that leaves you time to think with the difficult questions okay on Olivier's question about whether the extent of gradualism is excessive in this kind of a model yes okay because basically the market is unwinding and so the attempts at sort of pacifying the market are unsuccessful in equilibrium and you've just sort of distorted the rate now two caveats to that in the real world one is you have to believe something about the transmission mechanism in other words if you have a sort of classical view and all that matters for transmission is the long rate the long rate is kind of going to be what it's going to be no matter what and you haven't had much of an effect if you think that the short rate is an important part of the direct transmission mechanism because say you believe in a lending channel then you have moved the short rate away from where it would otherwise ideally be and then you have compromised something so that's one caveat you have to believe that the other is of course there are good reasons for some degree of gradualism and this is an idea that goes back to Bernard and others when you're sort of uncertain about the instrument uncertainty idea when you're uncertain about how much a funds rate move is going to do you might want to kind of tap tap tap rather than go so you know you don't want to take this too much and to say just because we see some degree of inertia and it's not a random walk that that's evidence of something wrong but I think you might sort of this would lead you to at least be a little bit skeptical about sort of this very very excessive sort of extreme gradualism that we see on the other point about narratives I think this is like incredibly important I don't know how to quite formalize it but you know data everybody says data dependence we're gonna be data dependent it's a meaningless statement in and of itself because there's an infinity of data and so unless you sort of are willing to sort of pony up a model that tells you which data is important it doesn't really have much content and then this is where I think narratives are very important because I think the narratives or the paradigms or whatever are prone to shift a little bit abruptly and when they shift abruptly all of a sudden data that was always there in plain view becomes all of a sudden relevant so you know there was a period I can't remember it was 2015 or 2016 there was some bad news out of China and the Fed was kind of on hold and all of a sudden this low R star narrative kind of comes to the fore well whatever R star was it hadn't changed very much in recent months it's a very very slow moving variable but it comes to the fore and that becomes a permanent narrative and so I think that's a very interesting these things don't move the narratives don't move continuously so the data that all of a sudden you're drawn to looking at even though the underlying data may be smooth if you're all of a sudden shifting your attention from one to the other that's the sort of interesting thing I think that has not been really kind of analyzed but I think that's a really sort of centrally important part you're a little since my talk was on financial intermediation and transmission focus on how to make transmission better well something about communication there should be a review of communication and in my view there should be some thinking about focusing on talking to the playing people who don't understand monetary policy but set prices but more importantly I think there should be a recognition that the control of inflation is not precise cannot be precise and having a target of close to but below two percent seems to be a bit more much more precise that quite can be achieved and it creates unneeded undeserved difficulties so I was going to actually echo Charles's point here and I've been thinking about it maybe a little bit more in the context of the Fed's communication review but I don't like and I'm uncomfortable with 2.0 as a thing and then we're going to have to hit 2.0 and if 1.7 were failing I would sort of prefer some kind of zone of indifference so that you know within that zone you can I think first of all it makes for better communication and second you don't force yourself to mechanically do things that are not appropriate for the circumstances of the moment so for example if you're at 1.7 inflation and financial markets are sort of in a normal state and you want to put more the pedal to the metal to try to get to 2 maybe that makes sense if there's sort of quite a bit of financial market instability and you're going to add more fuel to the fire really just to get from 1.7 to 2 I think you want to be able to condition on those circumstances and not set yourself this sort of overly precise target and I think that applies probably to the ECB as well so thank you I will not make conclusion they've done it and let me thank all the panelists for great insights on communication