Excerpts from remarks by Stephen Poloz, Governor of the Bank of Canada, at “Changing Market Structure and Implications for Monetary Policy”, Jackson Hole, Wyoming, 24 August 2018.
Our ability to measure the impact of digital technology is continually playing catch-up with the technology. At the same time, the diffusion of digital technologies to other sectors is itself a gradual process. We have seen a similar scenario before – it was several years before we could measure the rise in aggregate productivity that followed the increase in spending on information and communications technology in the 1990s.
Positive revisions to the history of potential output could help explain the underperformance of inflation over the past five years. This underperformance has occurred in a wide swath of economies, both advanced and emerging. These countries have, on average, a high level of Internet penetration – a possible proxy for the pace of adoption of digital technologies. Related to this, empirical evidence of the so-called Amazon effect on inflation, like the Walmart effect of 20 years ago, has so far been limited. But we need to bear in mind that this work relies on estimates of potential output that may be revised up in the future.
Of course, it would be considered risky to conduct monetary policy based on an assumption that we were enjoying a pickup in aggregate supply. Central bankers would generally require empirical evidence of the phenomenon before embracing it, because the consequences of being wrong could be significant. However, that does not prevent us from treating digital disruption as a risk to the inflation outlook like any other.
Arguably, this has already been happening in practice. Our economies have begun to return to normal after the trauma of the global financial crisis. But the process of interest rate normalization has been much more gradual than traditional models with embedded Taylor rules would advocate. Taking a gradual, data-dependent approach to policy is an obvious form of risk management in the face of augmented uncertainty.
Importantly, this approach does not mean keeping interest rates unchanged until inflation pressures emerge. That would virtually guarantee falling behind the inflation curve. Rather, it means following a more gradual approach to normalizing interest rates than traditional models would advocate, thereby balancing the risks around future inflation. The central risks that affect that balance are, on the one hand, the possibility that inflation could accelerate as we approach full capacity and, on the other hand, the possibility that digitalization of the economy is boosting aggregate supply and holding inflation pressures at bay.
The bottom line is that digital technologies are disrupting central banking along with everything else. Digital disruption is likely to be a major preoccupation of central bankers for the foreseeable future.