Citywire Selector’s Think Tank series is a showcase of leading strategists outlining what topics are dominating investment thinking at major private banks and asset management companies.
Here Maxime Alimi, head of investment strategy at AXA Investment Managers, investigates whether the digitalisation of markets is aiding central banks or proving detrimental in efforts to drive growth.
The digital economy may set a number of changes in motion regarding the way monetary policy is conducted. The first is about inflation targeting. Dramatic changes could take place in the way inflation is calculated and behaves. We see three reasons for this:
- Changes in the labour market and the determined income i.e. with more freelancing and fewer employees (“gig economy”), more labour market turnover and sector reallocations. This probably means more volatility in income and sector-specific dynamics beyond the overall macroeconomic trend, blurring the usual relationship between wages and core inflation.
- Changes to corporate pricing with a larger share of pricing strategies driven by micro rather than macro considerations. Intimate knowledge of clients’ behaviours will allow firms to adjust prices individually for a given good or service, making aggregate inflation more difficult to calculate and interpret.
- Changes to the consumer basket related to consumption patterns which are moving towards a greater weighting to services and a lower one for goods. The fact that many digital business models rely on free access to certain goods and services also make it more difficult to assess prices. Additionally, increased competition leads to continuous quality enhancements that blur the picture on prices.
Overall, this means that statistical offices and economic concepts require a rethink. Beyond measurement issues, theories may need to evolve and the relationships established by economic theory may need to evolve too.
While the majority of modern economic theory was built in the Fordist economic paradigm over the past 100 years, new concepts and workhorse models may emerge within the digital era.
The current debate among central banks about the Philips curve – the inverse dynamic between the unemployment rate and the rate of inflation - could be the beginning of a larger need to rework our understanding of the relationship between prices and employment. Research initiatives are already underway.
The digital transition also changes policy objectives. First, public engagement is needed to build the new digital network: accelerate access to internet and educate on its usage, develop or license the data infrastructure. Governments also need to adapt regulation and taxation to maximise the benefits of the digital economy.
This implies acknowledging venture capital and crowdsourcing as mainstream channels for financing innovation in the new economy. Embracing change and creative destruction can be painful as it implies inter-temporal trade-offs or pushing against legacy protection.
Meanwhile, some public policy objectives become more or less relevant. Public employment agencies may be largely replaced or enhanced by job matching algorithms.
Likewise, driverless transportation should reduce the need for traffic police while robots could assume a number of repetitive tasks currently performed by civil servants.
Changes in employment may conversely make housing policy more important if jobs are increasingly concentrated in large urban areas. Big data may also help to fine tune risk quantification and make a number of social risks currently pooled under public welfare schemes more easily shared in the private sector.
Finally, managing the fallout of automation on employment may represent a daunting task for public policy in the digital era. The speed and magnitude of changes under-way remain largely uncertain but debates are already heated about how to approach the topic.
Education policy will have to take up the challenge of retraining large numbers of people, with an increased focus on continuous training.