Philip R. Lane: Structural change and central banking: some research priorities
Contribution of the panel of Philip R. Lane, member of the Executive Board of the ECB, to the 5e Research seminar on joint regional financing agreements organized by the European Stability Mechanism
Frankfurt am Main, September 24, 2021
Structural changes (especially digitization and the carbon transition) are expected to have a great influence on macroeconomic performance over the next decade and are of paramount importance for central banks. In the European context, public policy is resolutely focused on promoting a harmonious and comprehensive digital and green transformation of the European economy, in particular through the design and funding of the Next Generation EU (NGEU) program.
In the spirit of a research seminar, my aim today is to present some questions that call for further research – both within political institutions (including central banks) and in academia.
These secular forces are closely linked. In particular, digitization can do a lot to facilitate a low-carbon business model, while changes in global patterns of energy use are clearly influenced by the energy needs of different strands of the digital economy. A wide variety of modeling and analytical approaches are needed to gain the necessary comprehensive understanding of the economic, financial and social impact of these structural changes, including the interaction effects between digitization and the carbon transition.
The digitization and greening of the economy requires significant levels of investment, from both the private and public sectors. In addition, public transfers and subsidies will be needed to ensure an inclusive approach. The financing of digitization and the carbon transition poses significant challenges for the financial system, taxation and public finances. Although these funding decisions are strongly influenced by political economy considerations, the design of optimal funding programs remains a high research priority.
For central banks, it is essential to monitor these underlying structural changes and assess the implications for economic growth and inflation dynamics in both cyclical and trend dimensions. The direct and indirect effects of digitization and the carbon transition on the financial system and the drivers of the equilibrium real interest rate also deserve an in-depth study, in particular in view of the possible implications on the monetary transmission mechanism. In particular, the net impact of these structural changes requires a large-scale intertemporal general equilibrium approach: short- and long-term forces may act in opposite directions, while the nature of the impact on supply economy needs to be assessed together with the implications for the different components of aggregate expenditure: public and private consumption, public and private investment, and export and import dynamics.
From a central bank perspective, the uncertainties associated with structural change reinforce the value of a stability-oriented approach to the conduct of monetary policy. In particular, a clear anchoring of monetary policy allows households, businesses and governments to focus on the many challenges associated with digitization and the carbon transition, knowing that monetary policy will be guided by a clear and predictable framework. which, in the case of the ECB, aims to stabilize inflation at 2% in the medium term. While the precise design and calibration of our policy instruments will certainly be influenced by these structural forces in the years to come, the policy objective will remain the same: to protect price stability by focusing on the objective of symmetrical inflation of 2%. In turn, our recent comprehensive review of the strategy has given us a very solid foundation to ensure that the conduct of monetary policy takes into account the economic, monetary and financial implications of digitization and the carbon transition.
ECB – European Central Bank published this content on September 24, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on September 24, 2021 01:31:01 PM UTC.