ECB's Merch speaking at Bank Negara, Malaysia 24 July

Speech entitled "Central banking in times of technological progress"

Says Mersch:

The first important consideration for monetary policy relates not to any particular technology, but to the overall rate of technological progress. As the technological frontier shifts outwards, and that knowledge diffuses across the economy, overall productivity increases. That increased productivity affects the rate of return on investment and hence the level of real equilibrium interest rates.

Since monetary policy aims to vary short-term real rates around that equilibrium to meet our price stability mandate, changes in the overall rate of technological progress affect the interest rates central banks set. As such, policymakers need to adjust policy settings to adapt to changes in the real economy.

Setting policy according to a fixed rule with pre-determined coefficients on inflation and the output gap is at the best of times likely to lead to sub-optimal policy settings, given the uncertainties in measurement of the output gap. But in times of technologically driven changes in economic relationships, such a rule could potentially result in interest rates that are wholly inappropriate for the economy and inconsistent with our mandate for price stability.

Yet that is not to say that different policy tools are all inappropriate. The past decade has posed a number of challenges for policymakers. For some observers, there appears to have been a secular fall in measured productivity growth[1]and equilibrium real rates[2]across advanced countries. Lower equilibrium rates reduce the room for manoeuver that central banks have to lower rates and still remain above the effective lower bound. Other observers attach more attention to measurement of productivity changes due to technological progress and globalisation and hence warn against hasty changes to targets and objectives.

At the same time, interbank markets in the euro area became fragmented along national lines during the crisis, threatening the transmission of monetary policy.

The various so-called unconventional monetary measures undertaken by the ECB and other central banks throughout the crisis are a good example of adapting policy to changes in the real economy. Forward guidance, asset purchases, negative nominal interest rates and lending schemes that incentivise banks to increase lending, such as the targeted longer-term refinancing operations, were all designed to combat the challenges of the period. Such policies were seen as appropriate - being both necessary and proportionate responses by central banks to fulfil their mandate for price stability. But as conditions normalise, it is unlikely that these policies will remain necessary.

Full speech here

ECB's Mersch- unconventional measures will become unnecessary