Yves Mersch: Remarks at the ‘Challenges in Understanding the Monetary Transmission Mechanism’ conference

• It threatens the effectiveness of monetary policy by preventing it from steering financial conditions.
• the targeted longer-term refinancing operations, or TLTROs) have been an effective and appropriate way to combat these challenges.
• And I have not even mentioned the insufficient robustness or reliability of some technologies like DLT, or their energy insufficiencies and dependencies.

How does technological change affect the monetary transmission mechanism and monetary policy?

• I will consider how technological change affects the following three broad channels of monetary transmission, without focusing on the consequences structural changes will have for the operational framework:
  1. How policy rates affect market interest rates and financial conditions.
  2. Labour markets and the non-accelerating inflation rate of unemployment (NAIRU).
  3. Price-setting and the Phillips curve.

  
  Technological change has multifaceted effects on the transmission mechanism. It is important not to jump to conclusions, for example that, because the Phillips curve has become flatter, monetary policy needs to be more aggressive. Let me add that, beyond technological changes, additional liquidity demand factors also stem from regulatory change, fragmentation and the fact that the banking union is incomplete.

Financial innovations have the potential to impact the way the economy is financed

• This has led to firms having a more diversified financing structure and has improved their resilience to shocks emanating from the banking system.
• Fintechs can lead to further bank disintermediation, but also financial deepening, by allowing otherwise constrained households and firms to borrow.

Labour markets and the NAIRU

• Fragmentation of labour time is shown in the diverging results of compensation per employee and compensation per hour worked.
• If there is a skill bias in the transition to digital technology, this could lead toa greater mismatch in labour markets, and therefore a higher NAIRU and lower potential output growth.

Price-setting and the Phillips curve

• Technological changes to price and wage-setting behaviour have much deeper relevance for central banks than just the measurement of inflation. The speed and extent of how inflation reacts to shocks affects the optimal monetary policy response:
  • E-commerce may result in suppliers changing prices more frequently.[10] Not only are Amazon’s prices more flexible than prices of brick-and-mortar stores, Amazon’s competitors are forced to adjust prices more often for products that are also offered by Amazon.[11] More frequent price changes result in a steeper Phillips curve – prices react more quickly and strongly to changes in costs and output. This could also mean that inflation reacts much faster to monetary policy.[12]
  • Since online stores effectively offer the same price across locations, e-commerce may restrict the ability of businesses to set prices that deviate substantially from those of large online retailers while reflecting local conditions. So prices may change more often, but they may be more uniform, which in turn may restrict the ability of prices to reflect idiosyncratic and regional shocks.[13]
  • E-commerce changes not only how firms set prices but also how consumers shop. It has revolutionised the transparency of pricing both within and across countries, allowing consumers to easily compare prices and swap one product for another. This can result in higher demand elasticities, eroding the monopolistic and monopsonistic power of suppliers and reducing mark-ups. Profit margins at Amazon (less than 4%) are much lower than at Walmart (more than 20%).[14] Such a change in demand elasticities and mark-ups can be viewed as a flattening of the Phillips curve.
  • Finally, the emerging prevalence of e-commerce can create new opportunities for consumers to switch their shopping outlets over the business cycle. For example, there is evidence that households actively exploit price differentials across stores and “trade down” in recessions (e.g. switch from a regular grocery store to a discounter). It could be predicted that this switching will be amplified in the future because switching to an online store is particularly easy. As a result, aggregate “true” inflation may be more cyclically sensitive than is suggested by headline inflation.[15]
• [9] The impact of e-commerce on the slope of the Phillips curve is uncertain, and studies have generally struggled to find large effects on annual inflation.
• Given the overall difficulty in estimating the slope of the Phillips curve, this is not entirely a surprise.

Conclusions