Central bank response to fundamental technological, institutional, societal and environmental change
There are a number of fundamental technological and structural global trends which have a potentially significant bearing on central banking, albeit over a longer period than the Bank’s typical policy horizon. Among the more important changes are demography, increasing longevity, inequality, climate change, the increasing importance of emerging economies and the development of digital currencies. The potential policy implications of these developments range from the evolution of real interest rates to risks to the financial sector to the future of money and banking itself.
The insurance industry, particularly life insurance, is affected importantly by these fundamental changes, whether they be climatic or demographic, raising questions over the appropriate levels of capital, how long-term assets can be valued and long-lived contracts written, and the ability of households to manage such long-term risks. Technology is potentially transforming the landscape for money and banking. New digital or e-monies and new methods of payment and financial intermediation raise fundamental questions for financial regulation, money demand generally and central bank money in particular. For example, might central banks issue digital currencies and what would be the impact on existing payment and settlement systems? Is the cryptographic technology behind Bitcoin transformational? How will financial regulation need to adapt if new non-bank credit intermediaries emerge in scale?
Fundamental long-term developments could also have wider implications for central banks. For example, climate change, and policy responses to it, could have a dramatic impact on investment, energy and financial markets, sectoral capital allocation and ultimately financial stability and growth. Demographic change could have significant macroeconomic effects if household saving rates or appropriate retirement incomes change or changing patterns of labour force participation affect equilibrium unemployment. And wider structural change in the labour market may affect the relationships between unemployment, output and inflation which are key to inflation targeting. Changes in the income distribution could affect investment rates and trend GDP growth rates. And the growing importance of emerging economies is likely to influence global patterns of saving and investment. What can we learn about the drivers of, and outlook for, these secular trends? Do these factors help to explain the downward trend in interest rates over recent decades? Do they suggest that this trend will continue or reverse in future? Could these and other sources of global imbalances place stress on the international financial system? And how should macroprudential, microprudential and monetary policy regimes be designed to accommodate these long-term shifts?