€A macro, money & risks reforms? Slides by Marc-Olivier Strauss Kahn, MNI, London-Singapore, April 9 2018 #BdFeco

1. EA macro, money & risks/reforms?
Marc-Olivier Strauss-Kahn, Banque de France *
Focus on the Euro Area (EA) with 3 main issues:
1. Will growth / inflation be stronger / lower for longer?
2. How different are EA financial conditions vs. US ones?
3. What are the main EA risks & needs/effects of reforms?
* This document does not necessarily reflect the positions of the Banque de France or of the Eurosystem
Presentation at MNI: London-Singapore, Monday April 9, 2018

2. -6
-5
-4
-3
-2
-1
0
1
2
3
4
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
% Forecast
1. Will EA/French GDP growth be ‘stronger for longer’?
IMF (10.17): EA OG closed later than US OG
2
* (B)MPE: Eurosystem (Broad) Macroeconomic Projection Exercise & BDF for France.
GDP
growth %
MPE* March 2018
2017 2018 2019 2020
EURO AREA 2.5 2.4 1.9 1.7
France 2.0 1.9 1.7 1.6
A. Periodic upward revisions versus Dec. 2017 and even more vs June 2017
Δ vs BMPE* Dec. 2017
2017 2018 2019 2020
+.1 +.2 = =
+.4 +.4 -0 =
ΣΔ vs BMPE* June 2017
2017 2018 2019 2020
+.6 +.7 +.2 -
+.7 +.6 +0 -
B. How is the Output Gap (OG) & how long can be periods of “overheating”?
but in MPE, OG more > 0 in 2020 =
EA Real GDP (100 = Trough)
90
95
100
105
110
115
120
90
95
100
105
110
115
120
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
20
Trough 1975q1 Trough 1982q3
Trough 1993q3 Trough 2003q1
Trough 2009q2 Trough 2013q1
Since 1995, periods
with OG > 0 (or > 1)
have lasted 5.8 (3.3)
quarters on average.
The current recovery is
slower than usual and
could last longer.
Moreover some argue
that potential GDP has
increased &, hence, OG
is not yet positive.

3. 28
32
36
40
44
48
52
56
60
28
32
36
40
44
48
52
56
60
2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1
March 2018 (cut-off Feb14 2018)
Dec 2017 (cut-off Nov 28 2017)
1… Will headline/supercore inflation be ‘lower for longer’?
3
€ Effective Exchange Rate (38) Oil prices (in €, futures)
Euro Area
Inflation %
MPE* March 2018
2017 2018 2019 2020
Headline 1.5 1.4 1.4 1.7
Supercore 1.0 1.1 1.5 1.8
Δ vs BMPE* Dec. 2017
2017 2018 2019 2020
= = -.1 =
-.0 -.1 -.1 =
ΣΔ vs BMPE* June 2017
2017 2018 2019 2020
= +.1 -.2 -
-.1 -.4 -.3 -
A. Lowflation generally revised … downward, esp. supercore & vs mid-2017
B. € TCEN appreciation = negative impact, despite higher oil prices in euro
100
104
108
112
116
120
100
104
108
112
116
120
2014 2015 2016 2017 2018
NEER38
March 2018 (cut-off Feb 14 2018)
Dec 2017 (cut-off Nov 22 2017)
June 2017 (cut-off May 16 2017)
June 2017 (cut-off May 16 2017)

4. Y = -0,1733.X + 2,972
0
0.5
1
1.5
2
2.5
7 8 9 10 11 12 13
Simple EA Phillips Curve
(see P. Praet)
2005 Q2 - 2008 Q1 2008 Q2 - 2008 Q4
2009 Q1 - 2009 Q3 2009 Q4 - 2011 Q4
2012 Q1 - 2014 Q2 2014 Q3 - 2015 Q2
2015 Q3 -2020 Q4
Unemployment rate (%)
HICPsupercore,%Y-o-Y
Source : Eurostat, BMPE
2017 Q4
2005 Q2
(sample : 05 Q2 – 17 Q3)
4
1… Is the Phillips Curve (PC) still alive & well in the EA?
oil
price
drop
Phillips Curve for headline inflation, EA
1999-2017 (74 obs. quarterly data), BDF *
Dependent variable
π (t)
1 2
π (t-1) 0.39*** 0.27**
Output Gap EA (t-1) 0.04* 0.07***
Output Gap world ex. EA(t-1) 0.00 -0.02
∆ import prices(t) 0.09***
Dummy VAT hikes 0.17** 0.22***
R2 (adjusted) 0.23 0.57
The chart shows a simple PC for the EA,
relating supercore HICP & unemployment.
It looks steep and stable enough over the
period 2005-20 (including forecasts).
External shocks, here in grey (e.g. ∆ oil
prices), shift the curve inward or outward.
Once import prices (rather than world OG)
are included, the equation performs well.
* ‘The impact of import prices on EA inflation’ (2017), BDF RdB 37

5. 2. How different are EA financial conditions vs US ones?
5
FACT: clear disconnect of EA (DE) rates (2y) vs the US, incl. post net purchases
-300
-200
-100
0
100
200
300
-2
-1
0
1
2
3
4
5
6
7
8
9
1/2/1995 1/2/1999 1/2/2003 1/2/2007 1/2/2011 1/2/2015
Spread (bps, RH scale)
DE (Zero coupon, 2Y, LH scale)
US (Zero coupon, 2Y, LH scale)

6. ‘The future of Odyssean and Delphic Guidance’, C. Evans, Chicago 11.14 .17
2. ECB replication
Loss Function:
L=(π-π*)²+(u-un)²
The loss drops
from
≈ 2.5² in Jan. 2015
to
≈ 1.1² in Mar. 2018
2… How long will be the need for lower key short rates?
3. ‘More appropriate illustration’
for the ECB given its ≠ mandate
1.
6
The target was about
here at the time of the
outcome-based FG
Realized
Headline
Inflation yoy
End of Forecasts
Headline Infl. yoy
The target
shifts left
as the
Nairu
drops
3.18.

7. 2… How much uncertainty on term premia vs expectation?
7
ECB JSZ (OIS): Joslin et al. (2011)’s model applied by the ECB on OIS data; BDF MPRR (OIS): Monfort & al. (2014)’s model applied by
the BDF on OIS data & US ZCB; Fed NY ACM (ZCB): Adrian & al. (2015)’s model applied by the NY Fed on US ZCB
UnitedStates
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
ECB JSZ (OIS) BDF MPRR (OIS)
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
ECB JSZ (OIS) BDF MPRR (OIS)
EuroArea
Expectation component Term Premium component
0
1
2
3
4
5
6
7
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
NYFed ACM (ZCB) BDF MPRR (ZCB)
-1
0
1
2
3
4
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
NYFed ACM (ZCB) BDF MPRR (ZCB)
Lower term premia in all models are evidence of QE effectiveness.
The higher the term premia, the smaller the snap-back risk: BDF model vs. ECB or Fed
(the BDF model takes account of ZLB in US and ELB in the EA)

8. 3. What are the main risks & needs/effects of reforms?
8
Risques externes Risques domestiques
STRONG € APPRECIATION
EA BOND MARKET TURBULENCES
FISCAL STIMULUS IN SURPLUS COUNTRIES
UNDER-ESTIMATED MOMENTUM (inertia)
UNDER-ESTIMATED POTENTIAL GROWTH
GDP -
Inflation +
GDP -
Inflation -
GDP +
Inflation -
GDP +
Inflation +
OIL PRICE HIKE
US MONETARY/FINANCIAL SHOCKS
TRADE WAR
POPULISM/ ITALY
IMPACT OF MAIN RISKS
GDP
Inflation
BREXIT/CATALUÑA
External risks Domestic risks

9. 0%
1%
2%
3%
4%
5%
6%
7%
Labor market Product market
3… Which reform impact & link with financial constraints?
All large EA countries would
substantially benefit from
structural reforms (up to 6pp).
Progress has already been
made since 2013, date of last
OECD regulatory indicators
A. Potential GDP added after 10 years in the event of structural reforms
Source: Cette & al. (AER, 2016)
9
+ +
?
- -
Financial
constraints
cleansing
mechanisms
Incumbent
firm
productivity
Global
productivity
growth
=>
B. Productivity impact of financial constraints (Ph. Aghion, G. Cette & al., 2018)

10. 10
A “microeconomic” accelerator
A financing union for investment and innovation
Completion of
Banking Union
Consolidation
of European
banks
Incentives for
Cross-border
investments
Harmonisation of
accounting, tax &
insolvency rules
Pan-European
savings products
European venture
capital
Control of vital
financial
activities and
risks
Savings
exceed
investment
by about
350 bns EUR,
but
fragmentation
Innovation
and
digital
SMEs
Green finance
& energy
transition
3… Why a Financing Union For Investment & Innovation?

11. Conclusion: COORDINATED ACTIONS & ACCELERATORS
To avoid overburdening monetary policy, the current EA expansion offers a ‘golden
opportunity’ for EA coordinated action, based on a renewed confidence with:
- Decisive structural reforms, already started in France and Southern countries, and
- Continued fiscal support in surplus countries (cf. Germany)
Beyond the usual geo-political risks, uncertainty lies less in the EA than in the US
(return to twin deficits, public debt snowball, currency/trade war, …).
11
Domestic
structural
reforms
Macroeconomic accelerator:
Collective economic strategy
Fiscal accelerator:
EA budget
Institutional accelerator:
EA Fin. Min., Parliament, EMF…
Microeconomic accelerator:
Financing Union
for Investment and Innovation
Reminder of the 4 accelerators:

12. ANNEX: is the financial cycle ahead of the business one?
12
FR Inflation EA Inflation
EA Financial cycle (RH scale)FR Financial cycle (RH scale)
Financial cycle = average of 4 variables: real quarterly credit growth, residential property prices, equity prices,
quarterly ∆ (pp) of real sovereign yields. Values > (<) zero = cycle > (<) its historical median. EA cycle defined as
average of FR, DE, IT & ES. Schuler & al. (2015) – “Characterising the financial cycle - a multivariate and time-varying approach”