The world is undergoing a ''deep technological revolution'' (DTR) and not a secular stagnation – and since 2009, it has fortunately done so in a context of revised financial regulations. As a result, policies that the debate on secular stagnation has not identified are available.
That is the message of research by Philippe Moutot, to be presented at the Royal Economic Society''s annual conference in Brighton in March 2016. His study explains why and broadly describes those policies most relevant to central bankers:
• As it stresses the global but evolving nature of the transformation we are living through, assuming a DTR helps identify a factor – the bias against the financing of small innovative projects – which since the beginning of the decade has made investment and productivity in developed countries weaker than expected.
• A similar factor also bears on market-making: combined with an increased use of computer-assisted trading in a context where positions are settled at end of period rather than in advance, it has contributed to less liquid and less stable financial markets.
Furthermore, assuming a DTR makes it easier to explain:
• Why and how growth performances across developed and emerging countries are correlated; why global trade elasticity changed, while national trade elasticities did not evolve in a similar way.
• Why increased cash holdings of corporates in developed countries are consistent with low investment but also with limited feelings of insufficient financing expressed by small businesses in many countries'' surveys over the last years.
• Why market freezes are increasingly frequent and why this could be the rational outcome of competitive markets rather than a sign of irrational or unethical behaviours.
In turn, assuming a DTR allows more insight into current economic challenges as it helps point out policies which, up to now, have barely been discussed from that viewpoint.
It is first essential to limit the bias against small innovative projects by ensuring that rating agencies, banks, statisticians, economists and even accountants use all the relevant techniques and data for the purpose of rating innovative projects.
Second, the various measures that might stabilise the outlook for traders (more recourse to ex-ante settling constraints, OMT-like organisation of market-making, regulatory monitoring of discount rates used for securitisations) would need to be studied and discussed at international level.
Third, the co-ordination of monetary and financial stability policies can be improved without affecting the price stability mandate or the independence of central banks: if real estate bubbles are held in check by financial stability measures, it will allow monetary policies to hold technology bubbles in check more effectively while keeping interest rates away from their lower bound. This would lessen the impact of uncorrected biases.
Finally, in case quantitative easing measures would still be needed to jumpstart the economy, they could be framed so as to counteract the remaining bias on small innovative projects.
Such policies might promote productive investment and accelerate a return toward a more stable economic outlook while ensuring a higher benefit from the measures taken since 2009 to strengthen financial stability. In other words, they may help the DTR mature faster and thereby lessen the future occurrence of extreme income inequalities.
As these policies belong to the issues that central banks may influence but which may take time before reaching effective outcomes, ignoring them is a major risk for central bankers today.
What is the major risk for central bankers today? -Philippe Moutot, European Central Bank
This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the author and do not necessarily reflect those of the ECB.
