that monetary policy operates against an everchanging backdrop of ideas about the way the economy works, a theme that lies at the heart of my lecture. first, it is now widely accepted that there is no long - run trade - off between output and inflation. both theory – following friedman and phelps – and practice – particularly in the 1970s – showed that permanently higher inflation does not bring faster growth or higher employment, and may well reduce both. but in the post - war period views were different. in 1959 the radcliffe report on the workings of the monetary system seemed to support the idea of a permanent trade - off. the objectives of monetary policy included, it argued, “ a high and stable level of employment ” and “ reasonably stability of the internal purchasing power of money ”. but it went on, “ … there are serious possibilities of conflict between them. ” 4 second, the rate of inflation in the long run is determined by monetary policy, not by microeconomic factors. again, that is now taken for granted, but much effort was devoted to the imposition of detailed direct wage and price controls in the 1960s and 1970s. nicholas kaldor, adviser to harold wilson, wrote in 1971 that “ it is also far more generally acknowledged – even by conservative prime ministers – that the process of inflation is'cost - induced'and not demand - induced ', with the evident implication that it can be tackled only by an incomes policy'”. not many whitehall advisers would give that answer today. third, in the short run monetary policy does affect output and employment and so has the potential to be an effective stabilisation tool. reflecting a post - war consensus that monetary policy was rather ineffective, however, the radcliffe report concluded that “ …. there can be no reliance on this weapon [ interest rate policy ] as a major short - term stabiliser of demand ” 5 it is now accepted that monetary policy lies at the heart of any attempt to stabilise the economy. the source of monetary policy ’ s influence over output and employment lies in frictions, which mean that prices and wages do not adjust instantaneously to clear markets whenever demand and supply are out of balance. firms change prices only irregularly in response to changes in demand ; wages adjust only slowly as labour market conditions alter ; and expectations are updated only slowly as new information is received. such frictions generate short - run relationships between money, activity and inflation. 6 the nature of frictions goes right to the heart of

non - bank money might be the next big thing. or they might be a flash in the pan. i don ’ t have a bet here – i am a central banker not a venture capitalist. my job, as a central banker and regulator – in all of this – is to ensure that financial innovations, including new forms of digital money, do not impair the bank of england ’ s ability to maintain monetary and financial stability. this shouldn ’ t be confused with preserving the status quo. financial stability is n ’ t about protecting incumbent banks or other existing firms from competition. instead financial stability seeks to ensure that people and businesses can rely on essential financial services – like the ability to make a payment or the ability to get a loan – in bad times as well as good. a regulatory framework earlier this week, the bank of england published a discussion paper that examines the implications of stablecoins for its financial and monetary stability mandate. in it we present an illustrative scenario to examine the implications of the emergence of stablecoins and other new forms of digital money. the discussion paper models what would happen if a large number of households and businesses moved their deposits from banks and into a stablecoin or central bank digital currency ( cbdc ). contrary to some press headlines, even such a dramatic shift does not inherently constitute a financial stability risk as long as it happens in an orderly manner. in fact findings show that the implications of this in the long term for the ability of households and businesses to get a loan are relatively modest – although there is considerable uncertainty around this result. as such, while other risks may arise during a transitionary phase, the most significant risk arises from the potential for stablecoins in particular to undermine confidence in money and payments, and hence in the wider financial system. as we discussed a few minutes ago, the risk of a loss of confidence in the credibility and stability of private money is not theoretical. loss of confidence in private money can be a major threat to financial stability. but it is equally true that private money can be made acceptable as a widespread means of payment – indeed, as i covered earlier, the vast majority of money held for transactions in the united kingdom is already private. so, with the right regulation, a stablecoin could potentially be made safe for wide - scale use. our existing regulatory framework seeks to ensure that the public is able to trust the reliability and stability of the money it uses every day. banks are subject to extensive rules and