Technological change and the monetary policy effectiveness

Last week I discussed GDP-B and its potential impact on monetary policy. The main takeaway was that, if GDP-B led to a higher production figure it didn’t necessarily mean that monetary policy needed to be tighter or looser – instead it is changes in prices and inflation expectations that remain key.

However, there is a key way that the technological change embedded in GDP-B could well matter for monetary policy – the way it influences how expenditures take place and how they are shifted through time.

Technological change isn’t just about some aggregate level. It changes the composition of products offered, the way buyers and sellers share risk, the information available to both parties, and the level of competition.

All these things have a huge economic impact that monetary authorities will need to consider.

One example I think is important is the shift from durable goods to rental products – through the rise of subscription services.

Subscriptions. Renting instead of purchasing durables.

Instead of buying an album from the most recent Disney movie I can sign up to a subscription to Spotify. By doing so I get access to the Disney music for a limited period of time, for a much smaller cost than buying the album.

This is an example of me buying a subscription to purchase a flow of services, rather than paying for a durable product up front that will provide a stream of durable services through time!

The more we switch to buying subscriptions instead of durable goods, the more we are paying the rental for the durable product as our expenditure – rather than spending a large amount on the durable good all at once.

As our expenditure on these products is now smoothed through time, the variation in demand due to the timing of durable good purchases is smoothed out. This helps to remove a key source of variability in the economy.

However, monetary policy partially works by shifting when people spend on these “durable items”. If they are less important, then changes in interest rates will also shift output by less.

The idea here is that if the cycle is “smaller”, the central bank doesn’t need to shift output by as much. However, for the same reason their policy can’t shift output by as much either!

So how does this work?

Imagine everyone stopped buying durable goods, and replaced those by purchasing a flow of digital services . In this case the purchase of the digital product is less lumpy than the corresponding durable good was, and so changes in the time profile of interest rates are less effective at getting you to shift when you spend on it.

For example, a lower interest rate might persuade me to buy a washing machine – but if I just hire a machine, a lower interest rate won’t convince me to pre-pay for all my future uses of the machine. As a result, the change in interest rate is less able to shift around my expenditures.

Worryingly, this also suggests that monetary policy will be less effective for certain shocks through this channel. If there is some other exogenous change in expenditure (eg demand for NZ exports drop), there is less scope to use monetary policy to fill this gap by getting consumers to increase their expenditure on durable products.