ECB's Cœuré: The rise of services and the transmission of monetary policy

16 May 2019

Benoît Cœuré, Member of the Executive Board of the ECB, focuses on secular forces that have shifted economic activity, employment and consumption expenditure across advanced economies away from manufactured goods and towards services.

He argued that these secular forces are likely to have played, and continue to play, a non-negligible role in explaining the sluggish response of inflation to economic activity and monetary policy in recent years.

He started by presenting some stylised facts that illustrate the extent of past changes in consumption and production patterns in the euro area, the United States and Japan. He then explained how these changes, and the shift towards services, are likely to have affected monetary policy transmission on both sides of the Atlantic.

In short, prices in the services sector change much less frequently than in other sectors and are less sensitive to exchange rates. This means that it takes longer for inflation to respond to changes in monetary policy and economic activity than it did a few decades ago.

He also suggested that the rise of the services sector in economies has only affected the pace of the response of inflation to shocks, but not the overall effectiveness of monetary policy. In other words, the effects of monetary policy take longer to pass through the economy but they have not become less powerful.

Finally, he argued that policies that can help raise productivity and competition in the services sector may contribute to reduce the lags with which monetary policy is transmitted to consumer prices.

He summed up his speech with three key takeaways:

• The first is that the rise of services in production and consumption over the past few decades has contributed to lift core inflation across advanced economies – making current low inflation appear even more puzzling.
• The second key takeaway is that services deepening has had a profound impact on the transmission of monetary policy, also in the euro area. It has lowered the median frequency of price changes in the economy, increasing the lag with which monetary policy is transmitted to consumer price inflation.
• The third and final takeaway is that the service sector itself is subject to change. The rise and expansion of “modern” services that can be delivered at distance means that competition and aggregate productivity may increase over time, thereby contributing to reducing price rigidity. Completing the single market for services in Europe, and reducing barriers to trade for services, would support this process and thereby also facilitate a faster transmission of monetary policy.

Full speech

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