o. gervais and m. - a. gosselin, “ analyzing and forecasting the canadian economy through the lens model, ” technical report no. 102, bank of canada, 2014. bis central bankers ’ speeches on the benefits side, they estimated that increasing the bank ’ s policy rate by 1 percentage point for one year would reduce real household debt by 2 per cent over five years. 5 everything else being equal, less household debt reduces the vulnerability of the economy and the financial system ; the results, however, suggest that this difference may be very small. on the cost side, the same increase in the policy rate might cut output by up to 1 per cent and push inflation down by 0. 5 percentage point relative to what it would have been otherwise. while, like any empirical results, these findings are a product of the methodology used, it is noteworthy that they are consistent across standard models – and indeed, similar results have been found using broadly similar approaches in other countries. these results suggest that, even though monetary policy could, in principle, be used to reduce vulnerabilities in the financial system, it may be too costly in practice. interest rates affect all parts of the economy and are too blunt an instrument to address an imbalance in just one part of the economy – household credit. if you have a specific imbalance, you need a specific tool to address it. the analysis relies on a number of assumptions about how monetary policy affects debt and how debt affects financial stability. the relationship between monetary policy and financial stability may depend on the specific economic conditions in which we find ourselves. 6 moreover, the processes resulting in financial cycles, with periods of unsustainable debt buildup, occasional crises and periods of deleveraging, are not well captured by standard models. 7 we have more work to do before we can be fully confident about our conclusions. here, i would like to focus on one critical aspect of the discussion : that monetary policy can affect financial stability only through its effects on household debt, even though it affects a wide swath of the real economy. however, we also need to envisage a case where the effects of monetary policy on financial stability are not limited to one sector, as in the case we just saw, but spread across many different parts of the financial system. in that case, monetary policy ’ s ability to get in all the cracks of the financial system – to paraphrase former federal reserve governor jeremy stein – would give

##notes. commercial bank money is widely used as a means of payment, a store of value, and for making loans in the real economy. but use of commercial bank money has come to rely on its relative efficiency, the regulation of the banking system to ensure its safety and soundness, depositor protection, and public confidence that commercial bank money can be exchanged for central bank money in the form of cash at all times. bank deposits – commercial bank money – therefore provide a single location for both the store of value and means of exchange functions of money. payments can be and are still made in central bank money, but increasingly less so. bank accounts are connected to a range of payment systems which provide the infrastructure to carry out the exchange of commercial bank money. these payment systems are also subject to public interest regulation focused on robustness, safety, and fair competition between them. viewed like this, an observer might say that this set of arrangements looks efficient. i would say that this has become increasingly the case in recent years as the options for making domestic payments have increased, particularly with the innovation of faster payments, in which the uk has been a leader. but that does not mean we should rest on the laurels and proclaim the end of innovation. new forms of digital money represent an important source of innovation, so we must evaluate whether and how they can meet our public interest objectives. a key point here is that rather than use commercial bank money as the basis for transactions, providers of digital money would create and use their own money or ‘ coin ’. and, they could be issued by companies, including large technology platforms, with the capacity to scale up and grow rapidly. these are often known as stablecoins. they are distinct from cryptoassets such as bitcoin, which have no backing and thus no anchor to provide stability of value. a cryptoasset is not money ( hence the term cryptocurrency is misleading ) and has no intrinsic value because it has no backing. it can have extrinsic value, in the sense that people like to collect and own them, just as they like to collect and own all sorts of things, but that extrinsic value is highly unstable and could be nothing. i have met crypto enthusiasts who take the libertarian view that something backed by nothing has more confidence in value than something backed by the state. suffice to say, that is not a view i agree with. with stablecoins,