On the other hand, it increases the degree of market power and mark-ups by increasing entry costs for competitors of “superstar” firms especially due to a strong network and platform effect. The overall impact is therefore ambiguous. Hence, digitalization should not only influence price level, but also its dynamics and its relation to real activities. B. Policy responses and the role of a CBDC The macro financial and macroeconomic possible positive and negative impacts of the spread of digital technologies create challenges to central banks’ roles and missions. Three of them are of particular relevance in the case of Europe: i) a risk to European sovereignty in payments with the emergence of digital solutions offered by non-European-players, being private or public; ii) a threat to monetary and financial stability, notably through the risk of a disanchoring of the role of central bank money both in the retail and wholesale space; and iii) a threat to monetary sovereignty with the rise of significant new private actors and settlement assets. Three policy responses are currently under consideration to address them. 1. Drawing up an adequate regulatory framework The first response is regulatory. The regulatory framework and the supervision methods have to evolve, to address in particular the threat to financial stability and monetary sovereignty that digitalisation of finance and the real economy may create. In this matter, the enforcement of national regulations will not be enough. One of the main challenge is indeed to make sure that all countries adopt strict enough regulations, especially regarding crypto-assets.

At the same time, academics have shown how the short-term output costs of price stability can be kept down if central  BIS Review 59/2007  1  banks adopt credible and transparent targets. I will mention here the New-Keynesian theory of price determination, which convincingly relates current inflation to future expected inflation, providing a yardstick for monetary policy actions and communication. In the ECB Governing Council, we are proud that we have been able to continue anchoring inflation expectations at levels consistent with our definition of price stability. But there is no room for complacency. The recent inflation success story and the central bank changes behind it need continuing social support. The public must have a clear-cut idea of what inflation means for their future income and job prospects. But while people appreciate the benefits of low inflation, differing national situations and economic conditions can alter preferences over time and from country to country. Let’s go back to monetary unification in Europe in the 90’s. We could argue that European citizens were not exactly clamouring at that time for a fully independent central bank tasked with maintaining price stability for the euro zone as a whole. What is more, some critics viewed the fact that would-be EMU members had to meet nominal convergence criteria as a costly economic sacrifice that was justifiable only on political grounds, if at all. Yet in some countries, and certainly in Spain, countering inflation with tight monetary and fiscal policies led to a virtuous circle, once convergence became credible.