The flipside of digital services is that more activities that were previously part of the market economy can now be produced at home. A person wanting to arrange a holiday, for example, no longer needs to visit or phone a travel agent, but can research and book the whole trip herself online. The sales of hotels and flights still contribute to GDP. But the work formerly done by the travel agent, which has now effectively been outsourced to the consumer, disappears. This also raises questions for how we measure productive activity. These examples highlight the difficulties of understanding how the economy is developing – let alone estimating its potential growth rate. To be sure, we should aim to rise to that challenge and update our statistics to capture such changes. But clearly, as policymakers, we also have to be humble about what can know. And in that context, imagining that we can reliably hold the output gap around zero is simply hubris. 2  See: Olivier Blanchard, Eugenio Cerutti and Lawrence Summers, Inflation and Activity – Two Explorations and their Monetary Policy Implications”, IMF Working Paper WP/15/230 (November 2015). 3  See: Erik Brynjolfsson and Andrew McAfee, The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (W. W. Norton & Company, 2014), especially Chapter 8. 4  https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/481452/ Bean_review__Interim_Report_web.pdf. 5  See Erik Brynjolfsson and Joo Hee Oh, “The Attention Economy: Measuring the Value of Free Digital Services on the Internet”, Thirty Third International Conference on Information Systems (Orlando: 2012).
The growing importance of balance sheet considerations in monetary policy only reinforces the importance of transparency in central bank communication. 5 Finally, let me make an obvious but nonetheless crucial point, even if it goes beyond today’s topic. Transparency is a valuable good in its own right. For good reasons, central banks are powerful and for the most part politically independent institutions. Moreover, the officials who run central banks are typically appointed for lengthy terms and are difficult to remove from their positions. Transparency is a crucial element in creating democratic legitimacy for politically independent institutions whose actions can have wide-ranging consequences for a country’s citizens and its elected government. As former Fed Chairman Alan Greenspan (1996) said ten years ago, it “cannot be acceptable in a democratic society that a group of unelected individuals are vested with important responsibilities, without being open to full public scrutiny and accountability.” Transparency is of little use if markets and the public do not believe what a central bank says. Credibility is therefore a condition that is a sine qua non for a successful monetary policy. How can credibility be established? Alan Blinder (1998) summarises credibility as a "painstakingly built up history of matching deeds to words". A long history of actually matching deeds to words, of honest communication and a reputation for delivering price stability will therefore ensure central bank credibility.