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The tale of the three stabilities: price stability, financial stability and economic stability

Summary:
Governor François Villeroy de Galhau of Banque De France in this speech: The past twelve months have seen some of the most dramatic events since World War II, with this unprecedented pandemic. For this reason, and given that today is about the Financial Stability Review, I will focus on the concept of stability itself. Other sources of instability have affected the world economy in the past decade or so: the Global Financial Crisis and ensuing recession, the European Debt Crisis, or more recently rising trade tensions. It seems that the world has become more unstable. Against this backdrop, stability is all the more important for our fellow citizens, and it has different dimensions, but I will focus mainly on three key aspects. I will start (and it will be a surprise to no one)

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Governor François Villeroy de Galhau of Banque De France in this speech:

The past twelve months have seen some of the most dramatic events since World War II, with this unprecedented pandemic. For this reason, and given that today is about the Financial Stability Review, I will focus on the concept of stability itself. Other sources of instability have affected the world economy in the past decade or so: the Global Financial Crisis and ensuing recession, the European Debt Crisis, or more recently rising trade tensions. It seems that the world has become more unstable. Against this backdrop, stability is all the more important for our fellow citizens, and it has different dimensions, but I will focus mainly on three key aspects.

I will start (and it will be a surprise to no one) with price stability. I will then turn to financial stability, which is essential for the effectiveness of monetary policy (by preserving its transmission channels). Finally, I will talk about economic stability and the way monetary policy, in combination with fiscal policy, can smooth the business cycle and foster a robust and sustainable recovery from the covid crisis. Clearly, these different aspects are closely intertwined: monetary policy, while pursuing its primary objective of price stability, can affect financial stability; fiscal and monetary policy closely interact with each other, as do monetary and macroprudential policy. But for the sake of clarity I will tackle each concept in turn.

Similarities to music:

In conclusion, let me say a few words on chamber music. Many of you have already heard the famous Piano Trio Number 2 by Franz Schubert. The harmony of the three instruments has charmed generations of music lovers, including Stanley Kubrick in “Barry Lindon”. In this piece, none of the instruments should be the only game in its own town. And none of them should be dominated by any of the other two, otherwise the harmony is broken. Quite the contrary, we can hear each instrument and the beauty of the piece comes from the response of each instrument to the others. The same applies to the three macroeconomic policies: monetary, macroprudential and fiscal. They should provide three kinds of stability in a delicate combination of “synchronisation without domination”. To overhaul the changing balance between an ex ante written music score and a real-time human interpretation, let us aim at least for “mutual predictability”…  And this is what today’s conference is about, for the macroprudential part of the piece. Thank you for your attention.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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