A H E M Wellink: The impact of new technologies on the implementation of
monetary policy
Speech by Dr A H E M Wellink, President of the Nederlandsche Bank, at a symposium of the Banque
de France on "New Technologies and Monetary Policy", Paris, 30 November 2001.
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When thinking about new technologies, Information and Communications Technology (ICT) is
probably the first thing that comes up in most people's mind. And, there are those who see an
acceleration in the diffusion of ICT as being equivalent to the concept of the 'New Economy'. For the
purposes of this conference, I would prefer to take a wider perspective, in which the new economy is
seen as the interaction of several mutually reinforcing factors. These include advances in ICT,
financial innovation and liberalisation, the globalisation of trade, improved functioning of markets and
enhanced macroeconomic management. The interplay of these factors has the potential to raise the
speed limits of the economy. That is, the new economy can operate at higher growth rates than in the
past without generating additional inflation. Therefore, both the initial hype surrounding the new
economy with some pronouncing the demise of the business cycle, as well as the elimination of the
new economy all together in response to current economic circumstances, seem to be misguided.
The jury is still out on the question whether we can detect a new economy in Europe. Without wanting
to prejudge the outcome, I would argue that there is no intrinsic economic reason to expect the new
economy not to materialise. So, assuming that it will take root, indeed what does this new economy
imply for the monetary policymaker? I have a couple of general observations to make.
First, the new economy influences the transmission of monetary impulses through the economy. It can
be argued that in the new economy it will take less time for a monetary policy impulse to have an
impact on inflation and output, while the impact of a given impulse will be smaller. Since there is a
separate panel discussion devoted to this topic, I will leave it at that and move on to the second
observation.
That is, policy makers do not bring about the new economy. It is the result of private sector behaviour,
driven by innovative entrepeneurship or, more fashionably, 'creative destruction'. Policy in general can
only be conducive to the new economy. In a market-based economy, private sector decisions are
guided by the allocative role played by the price mechanism, which performs best in an environment of
price stability. Hence, the monetary policy objective of price stability, which served us well in the old
economy, will help foster a new economic environment. It is no coincidence, therefore, that the
champion of the new economy, the United States, achieved its greatest advances in an era of low
inflation.
A third issue, crucial for monetary policymakers, is the question of how to react to the new economy.
Let me simplify matters by conceptualising the new economy as a shock to productivity. The economic
consequences of this shock will be felt in the long run as well as in the adjustment towards the new
steady state of the economy. Let me start with the long run.The new equilibrium is characterised by
structurally higher growth rates of productivity, implying higher profitability of investments. In order to
attract the capital needed to finance these investments, and achieve macro-economic equilibrium, a
higher interest rate is needed. The central bank must take this upward movement of interest rates into
account when formulating monetary policy. Before this new equilibrium is achieved, the economy goes
through a complex adjustment process. Analytically, this adjustment not only involves an outward shift
of the aggregate supply curve, which by itself implies lower inflation and higher growth. It could also
elicit a stimulus to aggregate demand, for example due to wealth effects. The latter would imply higher
inflation and higher growth. So, it depends on the circumstances and on the stage of transition from
the old steady state to the new one, how monetary policy should react.
It is important to note that the monetary strategy of the Eurosystem was devised in order to conduct
monetary policy in a particularly uncertain economic environment. The monetary strategy is
well-suited, therefore, to cope with uncertainties, including the uncertainty surrounding the effects of
the new economy. As such, the definition of price stability does not need to be altered and the
two-pillar structure will continue to serve us well. There could, however, be a need to re-assess the
information content of individual variables within each pillar. Let me try to illustrate this.
Advances in and the spread of ICT can lead to new forms of money, i.e. electronic means of payment.
Anticipating this, electronic money balances held by euro area residents have already been included
in the definition of euro area monetary aggregates. However, the new economy could change the
information content of the monetary aggregates. For example, electronic money could increase the
velocity of money, because people will be able to economise on their money holdings, only accessing
money when they need to spend it. Also, structurally higher productivity growth will eventually lead to
higher trend growth in the euro area. In due time, both effects could independently elicit an adjustment
of the reference value for M3. This issue is covered by the yearly review of the reference value for M3
by the ECB Governing Council. Under the first pillar, valuable information is also distilled from the
counterparts of broad money, such as credit variables. The development of new financial instruments
could change the information content of these variables. For example, securitisation places bank
assets outside bank balance sheets, which could complicate the observation by the central bank of
credit flows.
In the second pillar, the new economy could widen the range of useful indicators, i.e. because wealth
effects gain in importance. The information content of other indicators must be re-evaluated in order to
take into account a possible increase in the speed limits of the economy. The new economy could, for
example, lead to a downward adjustment of the NAIRU - the non-accelerating inflation rate of
unemployment. At the same time, variables that measure the current economic situation could
become more important, as these will be the first to reveal that the new economy has landed in
Europe.
Let me conclude with three key points. First, the new economy could have, and in my view will have,
important implications for monetary transmission. Second, the implications of the new economy for the
conduct of monetary policy are not clear-cut. Especially not in the transitional period to the new
economy. What is clear, however, is that price stability will remain at the heart of central banking.
Third, the ECB monetary policy strategy is well-suited to take the uncertainties surrounding the new
economy into account in policy-making. There is no reason to amend the two-pillar structure on
account of the new economy. Within and between both pillars, the assessment of all incoming
information is and will continue to be evaluated. This exemplifies the art of monetary policymaking,
both in the 'old' and in the 'new' economy.