 Without further ado, I suggest we move on to the roundtable. We are running behind and we know the governor can stay a little bit longer but not much. So we are going to start directly. I'll give a couple more minutes to John actually. He's not going to speak first but he was interrupted so that would be nice to have John spend a couple more minutes but we really have to keep on time. The roundtable is on the money and liquidity in times of crisis. It's an exciting topic and I could not dream of a better panel actually to discuss this topic. So let me, I'll be trying I know what you're going to talk about but there's a lot of overlap. Let me start with Amy. Thank you very much. It's wonderful to be here. So I wanted to say a few words about the sort of aborted financial crisis, generally financial crisis in the context of the COVID crisis. So to talk about the early signs of natural disruption in the United States during the COVID recession but also the ways in which government policy and central bank policy made a big difference. So the first reaction you might have when I talk about the idea of financial crisis in the context of the COVID crisis is just the reaction that there was no financial crisis and of course that's true. But it's not clear. I've been hindsight that was the only way things could have gone because in mid-March right after the onset of COVID once you all found out what was going on there were some pretty dramatic things that happened in financial markets. So in particular several people have documented that there were these dramatic increases in corporate bond spreads. Corporate bond spreads in the United States rose to their highest levels since the financial crisis. You know not quite as high as during the financial crisis but the same ballpark. But what happened after that was very different. So in the natural markets the Federal Reserve in the United States and of course central banks around the world introduced a number of facilities that they had first introduced during the financial crisis and spreads fell very dramatically over the following months and by late summer they were back to fairly normal levels. Now of course we'll never know fully what the counterfactual was but it seems very plausible that this reaction made a big difference. The labor market recovery has also been incredibly unusual. In the United States unemployment rose to about 15% in the United States peaking in April which was again truly historic in terms of the rise of the speed of the increase. But we had not only the most rapid increase in unemployment for a long time but also the most rapid decrease and in particular it was remarkable the extent to which the labor market consequences of the of the COVID crisis even the United States where there was less direct support for firms and so on than elsewhere were fairly concentrated in the sectors of the economy that were directly affected by the COVID crisis like for example you know the airline industry and so on. And the last thing I wanted to mention that has been very unusual during this COVID recession has been what has been happening with savings which have literally been off the charts if you've been using the axes appropriate for previous events. So the personal savings rate for example rose roughly to 34% in April from levels in the ballpark of 5 to 10% throughout the 2000s and this led to a completely unprecedented build-up of personal savings during the recession. Nothing like this has happened in any post-war recession in the United States. Now of course I don't want to say that all of this these differences had you know had to do with policy there's no doubt that a big part of the difference had to do with the original sources of the of the crisis you know the COVID shock was so different from other economic shocks didn't look like either really a demand shock or supply shock because there was also this big element of rationing where people were not were literally not allowed to buy or were you know it wasn't in the social interest to have people buying the things that they wanted to buy that was obviously part of what was going on with savings but still I think it is worth remarking on the incredible speed and force of the policy response to the COVID crisis not only the speed and force of the monetary response which I think no doubt was drawing on what a lot of what was learned in the financial crisis but also the speed and force of the fiscal response to the COVID crisis and and my guess is that you know we'll never know the counterfactual might might think it's very plausible that these government policies made a huge difference in crushing the blow and my sense is that you know this is something that makes sense to talk about exactly this forum because it's case where my guess is many of these policies would not have been possible without all of the research that occurred in central banks associated with the financial crisis you can see a very directly between many of the policies that were enacted during the COVID crisis and those that came before so let me let me uh stop there well thank you so much Amy let me turn to John and I don't know if you are going to continue with the dark side of quantitative easing but Amy talk about savings you may talk about investment indeed I want to thank my full time I may have spent too much time on my own talk um yes the dark side of quantitative easing quantitative easing is obviously aimed at flattening the yield curve particularly in the context where the short-term rates may be hitting the zero low about now may I take you back to my the little model I've just shown you imagine that the yield curve flattened the short-term interest rates do not drop because let's say zero low bound well now the what I call B which is the amount that Sam is willing to pay Emma for the initial project will not go up that much because B remember is the present discounted value of a relatively short horizon sequence of revenues net revenues after wages what Sam anticipates receive it whereas Q the price of buildings which is part of the cost of the investment for Emma goes up a lot and that from Emma's perspective is pure bad news she's not being able to borrow much more but on the other hand her costs are really shooting up now so it's um I suggest that one of the dark sides potential dark sides of flattening the yield curve is to suppress investment in the way that I've described but with a twist and literally a twist in the yield curve another I think important group in society that might be badly affected by this are young households trying to get on to the property ladder in the first place why because they usually are constrained by their net income they're again short fairly short run net income whereas the home that they're trying to buy is dramatically rises in value in response to want to do these and it's going to if the policy is working so they find themselves in a kind of double bind and unable to get on to the housing ladder now you might say well it's spring's around about someone has some losers but actually the embers of the world and the young people trying to get on the housing ladder are the very people it's in whom society is relying on for medium to long-term growth so maybe that's a little negative but I'd like to suggest that there is a dark side to quantitative easing thank you well thank you John Sylvanna you're going to mention the action of the back of England yeah thank you very much for having me in the panel money and liquidity in times of crisis is obviously a hugely important topic and as advanced economists recover from covid it's crucial to look back on central bank policies during the crisis now as Emi said although there were many unique features to the covid crisis there were also many similarities with other crisis in many of the monetary policy responses ex ante the rule of money and liquidity may seem less clear in response to the covid shock compared to a crisis that originated in the finance and sector when lockdowns were first imposed shutting down large parts of the economy fiscal policy was rightly the main actor and the obvious actor across advanced economies in providing insurance to those most affected but across countries there were also large monetary policy responses in the uk and we pick out three main ones first we cut interest rate to the lowest levels ever going one percent second those cuts were supported by multiple lending schemes including some jointly with government to ensure that the cuts were passed through to the cost of credit and that credit remained widely available and third we stepped up our qe purchases of government bonds using liquid central bank reserves and i'll come back to john's point in a second now each of these three policies aimed in different ways to use central bank liquid liquidity to support the economy the first one cutting rates was the textbook transmission of monetary policy we cut policy rates to help mitigate the fall in aggregate demand the shock was unique some sectors were required to fully shut down where the health risks were high but many other sectors remained open and we saw clearly over the pandemic that consumers and businesses were able to substitute spending and production significantly so lower lowering policy rates was important to support spending in those other sectors that were able to keep operating the other two liquidity channels relate to those that john has highlighted in his research with noble kiyotaki where they differentiate between financial frictions that induce a borrowing constraint limits on how much debt agents businesses and households can take on and those that induce a resaleability constraint or limits on the market liquidity of different assets the uk lending schemes in particular were aimed at preventing tighter borrowing constraints particularly where massive uncertainty had led to increases in perceived credit risk at the margin of course lowering interest rates should also have helped relax the borrowing constraints for firms with floating rate debt the cutting rates aimed to bolster cash flows reducing debt servicing costs as well as a need to increase borrowing to finance additional working capital needs and turning to the resaleability constraint the large-scale qe asset purchases stepped in where there had been a sharp reduction in market liquidity with things turning quickly towards market dysfunction as Amy mentioned in march 2020 this period has been dubbed a dash for cash some of my colleagues at the market finger have produced some excellent summaries of the events that took place john's work with Manuel farry has also taught us about the micro economic underpinnings of those liquidity shortages but at the very high level assets that were previously thought to be perfectly liquid were no longer liquid enough and liquidity premium didn't just rise on risky assets as we saw with mortgage back with securities back in the financial crisis yields spiked even on uk government bonds and us treasuries so for a period of time only cash the ultimate liquid assets would do and given the likelihood that those increases in yields would have fed through to activity in the real economy the central bank response was to offset that spike in demand for liquidity via a qe asset swap with central bank reserves um so in some sense i mean responding to john qe programs have done over time have done uh both buying a mix of liquid and illiquid assets during the dash for cash everything but cash was illiquid so the main transmission of qe at the time uh was more of your quality did easy rather than quantity did easy in in your taxonomy so to sum up stretching a bit the taxonomy the three policies so to set three frictions first and eukensian friction or nominal friction our star was falling so cutting rates had to stimulate our demand second borrowing frictions firms going out of businesses or cutting investment or households cutting their their own spending and third market liquidity or resaleability frictions with liquidity premiums piking on everything that wasn't cash all three frictions carried the risk of hysteresis which would have brought around the effects even longer without the policy interventions i'll pause here thanks so much ivena young you're going to go back both to the final four crises and also to your previous talk i'll give you a couple more minutes thank you and uh sorry about the technical glitches on our side so let me just to wrap up what i was saying before uh the main point i was trying to make was that uh when you're trying to estimate the slope of the philips curve using aggregate variation you face this incredibly difficult empirical problem uh which has to do with uh time variation in the monetary regime and you know the monetary regime has shifted quite a bit over the samples we use and so the point of this more recent literature that we've contributed to has been uh or one of the one of the upsides of that literature has been that when you compare one region relative to another within a monetary union you can difference out the monetary regime and that helps you very much in estimating the slope of the philips curve and so arguably you can get more credible slopes of the philips curves and and when we do that we estimate a relatively modest slope of the philips curve uh people differ a little bit in and how they interpret our slope some people say it's healthy some people say it's small uh that depends a little bit on where you sit but in terms of if if people are worried about very substantial movements in inflation we would like to argue that the debate should not really be about the slope of the philips curve it should really be about longer inflationary expectations and so when we worry about big increases in inflation we worry about central banks losing the anchoring of longer and inflationary expectations this then leads you to think more about things like fiscal dominance and so on but uh to turn to the topic of the panel um on money liquidity in a time of crisis um i wanted to uh i wanted to spend a few minutes thinking about the value of theory when it comes to monetary policy in a crisis um and i want to you know in particular discuss the response of the federal reserve uh to the financial crisis of 2007 to 2009 one of the important aspects of the response of the federal reserve to that crisis was a very substantial amount of lender of last resort lending and then asset purchases which usually go under the uh heading of quantitative easing now these policies at the time were extremely controversial for many reasons but one of those reasons was that a lot of commentators were worried that these quantitative easing policies would lead to a substantial burst in inflation um now why would that be why would you be worried about that well uh these quantitative easing policies they did need lead to a truly enormous increase in the monetary base so the monetary base in the united states rose from 800 billion to 1.6 trillions which doubled in the course of one year and then continue to rise after that and so you know if you have a cursory understanding of monetary economics you might say oh you doubled the money supply obviously there's going to be a lot of inflation um isn't that what we teach in our classes well interestingly enough monetary economists were not worried about a lot of inflation response to this policy and the reason for that is that this uh logic that i just gave you even though it is superficially a very compelling argument actually is flawed and and that's because um at the time interest rates were very close to zero and the fed had started paying interest on reserves and paying interest on reserves really fundamentally changes the nature of bank reserves and you know once you understand that then you realize that banks are happy to hold a very substantial amount of excess reserves and these the the very large increase in the monetary base does not translate into huge increases in the money supply held by the public like m1 and m2 and so on and the whole logic that you may have been taught in your intermediate macro class doesn't follow now you know somebody that has a bit more than a cursory understanding of monetary theory would understand this and and monetary economists they differed very substantially from other commentators during this episode in that they were not worried about inflation and we were lucky at the time that the people running the federal reserve remember these policies were very radical they were very large and we were lucky that at the time the people that were running the federal reserve had more than a cursory understanding of monetary theory and you know because you know you there was no history to go by in terms of thinking about the consequences of these policies you had to rely on your theoretical understanding of what the consequences of what you were doing were we're going to be and these people they they had a good understanding of this and therefore did these policies without being worried about something that turned out to be not important now fast forward to this the crisis that Solana and Emmy were talking about the covid crisis again the federal reserve engaged in very substantial quantitative easing and this time around at least this particular worry was not very prominent and that was because you know the intellectual war had been won on this point it obviously turned out to be the case that doubling the money supply in this particular way does not lead to a lot of inflation so I think that I always use that as an example of the value of theory when I teach monetary economics to my students okay well thanks so much let me just first that was great and you kept on time and it was very interesting so um I know the governor has a lot of constraints so I think it would be fair to ask him to ask a first question uh Jean let me first thank Silvana, Amy and John and Professor Mu obviously for all the insights because it it brought many many things but perhaps one reflection and then one question as Emmy said it's obviously a non-precedented crisis and a non-precedented monetary answer so what did we learn beyond the covid crisis for the future it's probably too early to tell but uh if I had to elaborate a first answer about what we learned we learned probably that central banks are never out of ammunition and remember what was the atmosphere before the covid crisis conventional wisdom said on both sides the Atlantic due to the low level of interest rates that central banks would be short of ammunition in case of a new crisis we had the worst crisis ever and we were able to react due to the fact and this is the focus of this roundtable that liquidity provision is probably extremely important and we rediscovered so to say the importance of liquidity provision if I may illustrate it in the case of the ECB everybody speaks about QE I'm not sure I agree with Professor Mu about the dark side of QE but it will be for another time when you come to Paris but we never speak or almost never speak about TLTRO which is a very important program in our case still more important if you look at its volume and we introduced a subsidy element in liquidity provision which is very innovative so we are not at the end of this reflection and third what Silvana mentioned probably what was very efficient in this crisis was a monetary slash fiscal mix and both of them were aligned are very powerful and sometimes we said in the governing council I don't say it publicly that fiscal policy is now the main transmission channel of monetary policy if you look for advanced economy it's obvious and this was very unexpected if I had one question John about what you said about monetary base increasing and no inflation and you gave very eloquently the reason for that everybody who understands monetary policy can understand why this time is different but I just said everybody who understands monetary policy if I look at public opinion and I guess it's not very different on both side of the Atlantic or on both side of the channel more than 95% of our fellow citizens at least don't understand monetary policy including in my own family I don't know how it is for your two children and me and John but I can imagine they are very well educated but it's really a challenge and this is important for us because there is a fear and it's a very frequently asked question saying so you create money we can understand that it's your freedom the central banks but how can you promise to us that you are not creating inflation and if you speak to a non-specialist I think that it's very important that we can explain that this former traditional link between monetary base or monetary aggregates as a whole and inflation which was the core of the simplified monetary sphere to put it in a nutshell is no longer relevant and so I would put the question to you how would you explain it how would you suggest to central bankers to explain it to our fellow citizens and hence to consolidate trust what could I um perhaps get off my chest the thing I would have liked to have said in my little interjection the other thing which is that I see I think we all see a very important distinction between as it were working off the liquidity premium on the one hand and working off the term premium on the other hand and in my remarks and the dark side of quantitative easing I had in mind the quantitative easing in the purest form that the central bank buys long-term government bonds which are as liquid roughly speaking as money itself in other words the classic as I see it the classic form of quantitative easing is working off the term premium now the whole business of providing liquidity in the form of trying to prop up markets that have gone illiquid I'm all for that but I guess of course one is that what's has been what's been achieved in the last 15 years but I'd like to sort of if nothing else for debating purposes separate that from quantitative easing so my remarks about quantitative easing were about that in reply just my my question to Amy and John is and the governor is maybe Amy and John's children are right at least somewhat so I take your point another the public need to be educated but I still think public the public's intuition maybe maybe not so bad and we may be in for a dose of inflation I think of me interrupting so John and so let me first say that I can very much relate to what you're saying about the challenges of communication I taught MBAs for some time and I was often struck by the fact that even just the word inflation was not really understood by the typical MBA student and typical MBA students a pretty educated person so I think that experience really changed how I thought about the issue of communication and I would emphasize that there was a very big difference between American MBA students and the and the ones from Latin America the Latin American MBA students all understood what what inflation meant and so I think you know part of the confusion that we see today is also of course related to the fact that you know monetary economics isn't hasn't been very important to the everyday lives of most people mostly because because central banks have been so successful and I guess that comes to where I don't have a full answer to you but let me just say that I think the success of central banks in controlling inflation over the past several decades is is is just incredibly impressive and I think sometimes they don't get enough credit for this because of course there are multiple objectives and it's not like the business cycle is totally been eliminated but it is pretty remarkable I have to think when the Fed is getting criticized for hitting inflation of 1.5% is it 2% and I say to myself that's pretty fine tuning for most economic policy when we're into the decimal places and so on so I guess on communication I would say that while I agree with you that at least given the fact that most people don't encounter economics in education until university they don't see it in high school for example it's very difficult to explain all the ins and outs of everything there is a set of results of what has been achieved over by now a pretty long period of time that I think the central bank can make reference to in kind of making the case to you know a less informed observer that they actually have control over the units you know and at the end of the day it's all about the units you know and in some since it is maybe in some abstract sense possible that the central bank sense you know they print the money that they control the units and make the units stable but I guess so I have two thoughts one is that history is is is impressive and I think drawing on the history and trying to make the case to the public makes sense and we're in a very different situation today than we were like in the United States in the early 1980s when there just wasn't that history to draw on and so I think that's you know one one one direction to emphasize and the other is just the commitment to this to this to the institution the stability of the institution which I think you know was core to to making that that that history come to pass thank you Silvana you raise your hand yeah just uh as one of latin america latin americans in uh in the example uh growing up in argentine of course everyone knows what inflation is I mean since you're a little child you would run to the shop as you as soon as you get the bill in your hands I mean that's the training so everybody really knows and as emi says it's a sign of success of central banks and advanced economies to large extent that people are not worried about that constant source of stress for people in many latin america countries definitely argentina venezuela right now um where you really have to stress on on a daily basis about about inflation on communications of qe is so tough to explain I mean I think it's sometimes the easiest way to explain the distinction between cutting rates and doing qe is that rates cutting rates is operates on on the short end and qe affects yields in in the longer term or rates in the longer term and sometimes people can can understand those concepts a little better but this brings me back to something that john was saying but in some sense uh you know the falling interest rates is not qe john as you know it it's it's a real phenomenon and there are many factors there and before you cited japan I mean there's demographics there's productivity growth um there's tail risks that are valued differently and and so all these factors have made this secular rate fall and then qe is operating on that very tiny margin okay how much can the central bank lower yields relative to those our stars and you know that's that's the margin of action for us in terms of stimulating the economy um but yeah and I fully agree with you that in episodes of market disruption that's when you have a full power because you you can really um um act on those liquidity spikes by spike up and in liquidity risk thanks thank you uh for finally here do you have any other question I know we have to finish in three or four minutes so that uh okay can I only word at one sentence from a policymaker standpoint john yes yes no uh just to say that the more innovative and sophisticated we are in our tools and we must be innovative and sophisticated the more open minded and simple we must be in our communication to the broad public and this is an interesting challenges on both side and you feel as I do feel that there are growing questions from our fellow citizens about our monetary power and they speak sometimes of miracle but this this word is a bit ambivalent and so we have this double challenge of digging always into more sophisticated and innovative territory but keeping close eye on the broad public and trying to explain more and more sophisticated things in a more and more simple wording but this is it belongs to the charm of the job if I may say it so so okay um we all have lots of questions I certainly do but I think it's time to call it a day let me thank once again the governor and Olivier for for that time and for being here I would like to thank also the staff of the Bank of France and TSC for organizing this event and I would like to congratulate once again the lawyers that prove you know how great they are how great economies they are and that was not the deep but still we had wonderful talks um you're really transforming the field so that's very nice and thanks for accepting the price um we look forward to seeing you in in Paris and in Toulouse as well you are first welcome to both places so thank you very much and we'll see you soon hopefully thank you thanks a lot bye thank you