Technology is among the most changing aspects and industries around the globe, the recent Crypto Currencies-Block Chain is one of the examples, and prior to that, E-Banking, E-business, E-commerce. Central banks (Bank of Uganda) should react prudently, and in the same forward-looking fashion that we implement policy.

The first important consideration for monetary policy relates not to any particular technology, but to the overall rate of technological progress. As the technological frontier shifts outwards, and that knowledge diffuses across the economy, overall productivity increases. That increased productivity affects the rate of return on investment and hence the level of real equilibrium interest rates.

Since monetary policy aims to vary short-term real rates around that equilibrium to meet our price stability mandate, changes in the overall rate of technological progress affect the interest rates central banks set. As such, policymakers need to adjust policy settings to adapt to changes in the real economy.

The various so-called unconventional monetary measures undertaken by central banks throughout the crisis are a good example of adapting policy to changes in the real economy. Forward guidance, asset purchases, negative nominal interest rates and lending schemes that incentivize banks to increase lending, such as the targeted longer-term refinancing operations, were all designed to combat the challenges of the period. Such policies were seen as appropriate – being both necessary and proportionate responses by central banks to fulfill their mandate for price stability. But as conditions normalise, it is unlikely that these policies will remain necessary.

Current technological progress poses a particularly acute challenge because of its direct impact on the price-setting behaviour by businesses that underlie the inflationary process. These technological advances can affect how domestic inflation reacts to shocks. These factors pose their own issues for the measurement of inflation. Technological progress has resulted in the creation of products such as smartphones and internet service providers that had no equivalent in the past, and the conceptual foundation of inflation being the annual change in prices is challenged when some electronic articles have a shelf-life of less than a year

Technological changes to price and wage setting behaviour have much deeper relevance for central banks than just the measurement of inflation. E-commerce can erode the monopolistic and monopsonistic power of suppliers of goods and services, reducing mark-ups has a weaker impact on inflationary pressures. Conversely, e-commerce may result in suppliers changing prices more frequently. E-commerce may restrict the ability of businesses to set prices that deviate substantially from those of large online retailers

Another impact of technology on central banks is that of payment systems. Beginning with cash (fiat money – coins and paper), something that central banks have issued since their inception. For cash to carry out its roles as a medium of exchange and store of value, the public has to have trust in its integrity. Several private sector payment instruments and systems are already well established: credit cards, direct debits and online payments to name but a few. More recent developments include payment methods based on smartphone technology, mobile wallets and investigations into the use of distributed ledger technology. These technological developments have encouraged some to argue for the abolition of cash.

In terms of the cost savings from new technologies such as the distributed ledger, I would again add caution. Far more detailed research is needed into the most beneficial system for all parties, and not just for financial institutions it would be appropriate for central banks to adopt technology that best reflects the general preferences of the population to enable changing preferences to be fulfilled in a secure fashion.


Technological change is an integral driver of economic development and in this case central banks are well advised to be prudent and forward-looking when approaching the respective challenges. I would like to recommend the following to central banks

• Adopt appropriate technology that enables them to best carry out our functions, appropriate does not always mean the newest or most fashionable technology. Each new advance must be carefully and prudently assessed for its potential impact.

• Formulate and implement our policies to take into account technology-driven changes in the real world.

• Anticipate technological risks to operations and devise means of mitigating them.

by Emmanuel Bugembe

Passion: Accounting, Finance, Economics, Tax, Auditing and General Business.

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