So the technologies that support money in the UK are central to our purpose and we need to assess how changes in those technologies – physical, legal, institutional (public and private) will affect that purpose. Against that background, I want to pick up two changes in the technologies supporting our money. I am not referring here to Bitcoin or crypto-currencies, on which so much ink (physical and virtual) has been expended recently. I want rather to talk about two related developments that are actually happening or about to happen. The first is the growing use of non-cash technologies for small value payments. And the second is the change to the way we manage and use our payment accounts at banks, the form in which most of us hold our money. As I noted, some £ 20%, of the money in the UK is issued by the public sector. A very small amount of this, by value, comprises the coins issued by the Royal Mint. The rest is Bank of England money. Bank of England money is used at the extreme ends of the payments hierarchy – for the very largest and for the very smallest transactions. At the top end, the very large payments that private banks make to settle their claims on each other must be made in ‘Bank of England’ money by transfers between the banks’ reserve accounts at the Bank of England. This happens over an electronic payment system, the Real Time Gross Settlement (RTGS) system operated by the Bank of England.
Or should they stay their hand, in the expectation that what appears to be structural unemployment might actually be cyclical? This is the debate that I would like to enter into today, from the perspective of the euro area – that is, to ask whether we have indeed seen significant hysteresis effects, and whether this warrants changing how we think about our monetary policy decisions. My tentative answer today is that we have not yet seen hysteresis in its typical form – we have seen scratches, not scars. And though this more subtle type of hysteresis may warrant policy accommodation over a longer period, this is solely with the aim of achieving our price stability mandate, not preventing a rise in structural unemployment per se. Indeed, if those two aims were ever in conflict, our choice would be absolutely clear. Evidence of hysteresis in the euro area Let me start with a chart similar to the one Larry Summers showed for the US economy in his seminal 2014 speech.2 You can see that the level of potential output in the euro area today is much lower than what we had expected before the outbreak of the crisis, assuming it would have continued to grow at its 2007 growth rate. By this measure, the output gap has largely closed – not because the economy has been doing so well but because potential GDP has been revised significantly. These effects have been taken by many as evidence for hysteresis.3 But the discussion is arguably more complex than this.