To ensure that the consequences of any failure are contained, the experiments are conducted within agreed boundaries, such as the number of clients, scope of the activity, etc. The experiment is time-bound. If successful, the entity must exit the sandbox and fully comply with all relevant regulations if it wants to roll out the innovative product to the broader market. If the experiment fails, well, we all learn something. Regulatory sandboxes not only encourage FinTech innovation by providing a safe space for experimentation. They also give regulators an opportunity to learn the risks associated with new technologies and right-size regulation accordingly. In fact, the sandbox is an experiment not only for firms but for regulators as well. Harnessing technology to manage risk We must also look to harnessing FinTech to better regulate and supervise financial institutions and help them manage their risks. From a regulatory perspective, among the more promising applications of technology is in what is called “RegTech”, aimed at enhancing the efficiency and effectiveness of financial firms’ risk management and compliance. We can see RegTech advancing in several areas. Predictive analytics is being used in stress testing – to assess the ability of large, complex financial institutions to withstand a variety of stresses affecting different parts of the business in different geographies. Cognitive computing and behavioural algorithms are being used to monitor and detect suspicious trading and possible misconduct in financial institutions. Machine learning capabilities can help to identify subtle patterns in behaviour, which are hard to detect using traditional data analysis.

First, conducting monetary policy based on the view that potential is permanently lower – without clear evidence that this is the case – could prove self-fulfilling and costly. The evidence increasingly shows that destroying demand also affects supply. Research on recessions over the last fifty years has found that deep contractions – including those driven by monetary policy – lead to long-lasting effects on real GDP compared to the pre-contraction trend. [20] This suggests that current macroeconomic policies should be designed to avoid unnecessarily heightening the risk that the increasingly likely contraction in coming months becomes a severe and protracted one, which would scar the economy. This requires that energy and fiscal policies remain targeted and contribute to dampen inflationary pressures, helping to keep inflation expectations anchored while preserving productive capacity. But it also requires that monetary policy does not ignore the risks of overtightening. [21] If we were to compress demand in an excessive and persistent manner, we would face the risk of also pushing output permanently below trend, irrespective of whether the initial shocks were temporary or not (that is, even if a harsh policy reaction was unnecessary). And that could not be easily reversed by subsequent policy easing, not least because expansions do not rebuild supply nearly as much as contractions destroy it. [22] Second, even if we were to conclude that supply shocks will lower potential durably, we would still need to examine their effects on demand before deciding our policy stance.