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How People Think and How it Matters




Remarks – Jean Boivin
Deputy Governor of the Bank of Canada
Presented to: Canadian Association for Business Economics
Kingston, Ontario
It is always an honour for the Bank of Canada to be invited to CABE’s annual summer conference.  I am especially pleased to find myself in the company of so many fellow economists.
My remarks today will be about expectations—how people form them and how it matters for monetary policy.
I will be talking about how we think we think. At some level, this might sound absurd. Don’t we actually know how we are thinking?
This reminds me of a question once asked of me. While completing graduate school and looking for a job, I presented my dissertation at various institutions. The goal of my work at the time was to use historical data to document the behaviour of the Federal Reserve and how it had changed over time. On one occasion, after I had spent the better part of an hour explaining the brilliant methodology I was so proud of, someone asked, “Wouldn’t it have been easier to just go and ask Chairmen Greenspan and Volcker what they did?”
This was meant as a joke—although I am not sure I laughed much at the time. Whether it would have been conceivable to question directly the Fed Chairmen, I don’t even know. I would have certainly loved to. But that was not the point. Although we obviously learn much by talking directly to people and get important colour, actions are the results of a very complex process—believe me, something I appreciate even more now—and we cannot hope to get a complete understanding of behaviour simply by asking. That’s why I needed to take a hard look at the actions themselves.
This should resonate even louder in the context of today’s topic. As economists, we spend our professional lives trying to make sense of how the economy works. Ultimately, this understanding depends on how we think we think—and that’s not something we can fully understand by simply asking ourselves.
My goal today is to paint a portrait of the uncertainty we have about how expectations are formed and discuss the implications for two current policy questions: the desirability of price-level targeting and the implications of financial imbalances for monetary policy. I will end with a few remarks about efforts to deal with the uncertainty surrounding expectation formation and ongoing challenges.
Why Are Expectations So Important for Monetary Policy?
But the first question is: why are expectations so important to monetary policy? Economic outcomes are the result of people’s collective decisions and these decisions depend on how people think and what they expect the future to bring.
For example, a decision to buy a house will depend on expectations of future income, what interest rates might be, and whether one thinks the real estate will increase or decrease in value. The price a firm sets and the wages it negotiates with employees are influenced by its expectations about the rate of inflation in the coming quarters.
The future is inherently uncertain. Firms, individuals, families and policy-makers—all of us—form best guesses, or expectations, regarding events we are uncertain about.
This means that current economic outcomes are determined by what people think the future will be, not necessarily by what the future will actually be. People will be right or wrong about the future, but what matters to their decision today is their perception of it.
This perception can be fast changing, as recent developments in financial markets have once again made clear. A reassessment of the global economic outlook and a heightened degree of uncertainty contributed to the significant fall in equity prices and increase in overall market volatility of the past few weeks. But Keynes coined the term “animal spirits” to describe the emotional, non-purely logical state that influences our decision-making.1 With the unusual sequence of large drops and rebounds in capital markets in recent weeks,2 it is difficult to argue that fear and animal spirits were not also at play.
Obviously, given that expectations determine the evolution of the economy, they matter for monetary policy.
But it works both ways.
Monetary policy also influences expectations. In fact, expectations management—or the expectations channel—is a powerful tool through which monetary policy can influence and stabilize the economy. What people think future policy will be influences their decisions and can have an important impact today.
Through the adjustment of expectations, the monetary authority has the opportunity to better offset fluctuations in the level of output or inflation. This expectations channel of monetary policy has always been at work, but as its existence has become better appreciated, its influence might have become greater as well.3 We can see a clear illustration of its importance in the conditional commitment the Bank of Canada used during the financial crisis—one of three types of potential unconventional monetary policy tools at its disposal.4
In April 2009, the Bank stated that it would maintain the policy interest rate at 0.25 per cent from April 2009 to mid-2010, conditional on the outlook for inflation. This exceptional guidance provided additional monetary policy stimulus through greater certainty about the policy path and by influencing rates at longer maturities.5 The Federal Reserve used a similar device two weeks ago with the statement that interest rates are likely to remain at current levels through mid-2013.
But the expectations channel can also seriously handicap policy if not managed properly. As research and experience have shown, policy makers cannot manipulate the economy by creating false expectations without damaging their credibility. And with impaired credibility, a central bank’s influence on the economy is seriously diminished.6
This reciprocal dynamic between expectations and monetary policy is one of the most important insights of economic research of the past forty years. The successful achievement of monetary policy objectives helps to establish credibility and anchor inflation expectations. This credibility, in turn, gives the central bank greater scope and flexibility to stabilize the economy more effectively while keeping inflation expectations in line with monetary policy objectives.
These insights are the cornerstone of Canada’s inflation-targeting regime. Since its adoption, well-anchored inflation expectations have allowed businesses, individuals and families to take a longer view in their planning, which has led to a better allocation of economic and financial resources and a more stable economy overall.
Decision Making and Expectation Formation
So we know that expectations are crucial, but what do we know about how they are formed?
Trying to understand better how we think is a timeless quest, spanning numerous disciplines such as philosophy, psychology, biology, neuroscience and political science, as well as economics. These all offer different perspectives and the picture that emerges confirms in some ways the obvious: decision making is an extremely complex process. It is in part about conscious rational calculations, but it is also about the unconscious influences of intuition, beliefs, perceptions and emotions. In recent years, important progress has been made in satisfying the rigorous part of our brains and providing scientific support for Keynes’ intuition on the importance of animal spirits.
So what’s an economist to do? How do we form a view on how people think?
A useful starting point has been rational expectations. As the name states, it’s based on the optimistic assumption that people are as sophisticated as they can possibly be—that they fully understand how economies and markets work, take into account all the information available, fully appreciate the future consequences of their actions today, and make decisions that are fully consistent with this understanding.
Taken at face value, this might look like a completely crazy idea. The mere fact that we economists have jobs—and think that we play a useful role—contradicts rational expectations. After all, if everyone was so sophisticated in their understanding of how the economy works, why would the world need us?
But, while crude and simplistic, the assumption of rational expectations is a useful and tractable way to capture two fundamental ideas. First, what people think about the future can affect their current decisions. Second, in the face of changing circumstances, people will not forever do the same thing expecting a different outcome, to paraphrase Einstein’s oft-cited definition of insanity. They will eventually adapt their behaviour to changing circumstances or policies.
These insights have proven to be powerful7. As I discussed earlier, they make a compelling case for the importance of expectations for monetary policy and form the intellectual foundation of inflation targeting regimes around the world.
But rational expectations should come with warning labels: “Handle with care.” “Keep away from children.” The concept was never meant to be taken literally and never should be. While useful for some policy issues, it can be a very misleading assumption for others. In trivializing the decision-making process, it leaves out elements that have the potential to overturn important policy prescriptions.
Researchers across disciplines have investigated various aspects of decision making that are not consistent with a literal and simplistic interpretation of rational expectations. Here are a few key examples.
First, our conscious cognitive capabilities are limited. People are able to retain only a finite number of signals in their memory. Consequently, it may in fact be rational to ignore some types of information, or to be “rationally inattentive.”8 It also seems that these cognitive constraints may make us overreact or under-react to information depending on the general degree of uncertainty we perceive.
Second, perceptions and emotions can play an important role, even in the most practical business decisions. For instance, price changes might appear unfair to consumers and they may experience regret, disappointment and anger when they occur. To avoid alienating its consumer base, a firm might take these fairness considerations into account in its pricing decision, even if that means sacrificing some short-term profits.9 Some would say that this is just good marketing.
Third, dozens of unconscious tendencies and biases have been found to be “hardwired” into human behaviour. People often rely on a limited number of “heuristic” rules, or rules of thumb, to reduce a complex task of assessing probabilities of future events.10
These tendencies can lead us to: evaluate outcomes within a frame of reference or pre-existing beliefs so that we see only what we want to see; react to the order in which information arrives or put too much weight on some particular piece; be impatient and put more weight on the present; be overconfident in the face of uncertainty; be subject to herd mentality and believe what we do simply because others believe it as well; have a preference for the status quo; or see patterns where there are none and mechanically extrapolate current outcomes and views into the future.11
To be clear, the issue is not whether these behaviours and tendencies are ultimately rational. For instance, some patterns of behaviour, even if unconscious, could represent automated responses that millions of years of evolution and adaptation have refined and perfected. Rather the issue is that, rational or not, how we think involves many dimensions that a stylized view might miss and these have key implications for monetary policy.
Expectations and Monetary Policy Issues
For example, the way people form expectations has a significant impact on two issues that have been the subject of research at the Bank related to the renewal of the inflation-control target agreement between the Government and the Bank of Canada. These are the desirability of price-level targeting versus inflation targeting and the nexus between financial stability and monetary policy.
Let me talk about price-level targeting first.
Research has shown that targeting the price level instead of the rate of inflation could help better stabilize the economy. Under price-level targeting, the monetary authority would commit to reverse deviations of the price level from its target path. If properly understood, firms should feel less compelled to change their price since they know that the effect of shocks on the price level will be reversed. Since prices do not move as much, smaller adjustments in production levels are required. In essence, what price-level targeting does is to make expectations act as a buffer against shocks, delivering lower volatility in both inflation and output.12
This could prove particularly useful in situations where deflationary forces cause the zero lower bound on the policy rate to bind. The promise that the effects of shocks pushing the price level below target will be reverted means that prices don’t have to fall as much today. The only way by which monetary policy can bring the price level back up to its target is by eventually injecting further monetary stimulus. The promise of bringing the price level back to target is thus equivalent to a promise of future monetary policy stimulus which helps to stimulate the economy today.13
Clearly, then, under price-level targeting, expectations do the heavy lifting. They serve as automatic stabilizers in response to shocks. But if people’s expectations do not adjust favourably, the edge of price-level targeting over inflation targeting diminishes.14 The success of a price-level targeting regime would depend on how quickly the public learns and adjusts its expectations and on the degree of credibility with which policy-makers can implement price-level targeting.15
Our understanding of behaviour and of expectation formation also has an impact on a second question that has come to the forefront in the aftermath of the crisis: to what extent does monetary policy have a role to play in supporting financial stability?
A blind faith in purely rational expectations would tilt one towards the conclusion that monetary policy—and in fact most policies—would have a limited role in this regard. Asset prices should reflect all available information and the best decisions people could make given this information. Contracts should be designed optimally, reflecting a complete understanding of the consequences of the incentives at play. If expectations are assumed to be fully rational—while not impossible—it may be harder to see how bubbles could form.
But, as the recent financial crisis made clear, various facets of human behaviour and decision making can contribute to the build-up of financial vulnerabilities. People show a tendency to forget the past and assume that the future will be like the present. Periods of stability could breed complacency, making us overconfident that good times are here to stay and generate an excessive appetite for risk.
The existence of such patterns of behaviour reinforces the importance of proper regulatory and supervisory policies.16 After personal responsibilities of the borrower and the lender, these are the next lines of defence against the build up of financial imbalances. But we cannot rule out the possibility that monetary policy might also, in some circumstances, have a role to play. In fact, monetary policy could itself be a contributing factor. For instance, if people mechanically extrapolate the present into the future, or overweight the present in their risk assessment, low interest rates—or a perceived certainty around their future path—could generate excessive risk taking on the part of financial institutions or induce people to take on more debt than they should. These are some of the manifestations of what is known as the risk-taking channel of monetary policy.17
Policy makers are grappling with these and other issues, all of which are affected by the formation of expectations.
What Does It Mean for Policy?
Faced with the uncertainty and complexity of decision making and our imperfect understanding of it, what should policy makers do?
For a start, we need to embrace this uncertainty. We cannot be dogmatic. We need to take a broad perspective and make sure that our decisions are robust by choosing policies that would be desirable under different types of expectation formation. This is another important reason why monetary policy cannot simply follow mechanistic and simplistic rules.
This is why various types of expectation formation mechanisms are explicitly included in our analysis at the Bank of Canada. We look at different surveys of expectations from forecasters and business owners. Also, one of our main policy models, ToTEM, allows for different types of expectation formations—incorporating both forward-looking expectations and alternative types as well.18
We also need to push our understanding of decision making further. This requires that insights and tools from the other disciplines that study the human brain and its decision-making processes from different perspectives be more integrated in our economic research and policy analysis.
In that spirit, Bank researchers have recently been drawing on the growing field of experimental economics to investigate more directly how people’s expectations behave and adapt under different policy regimes. Simulations that replicate key features of the Canadian economy have allowed us to observe how people’s expectations change when we tweak some aspects of the environment. For instance, in one set of experiments, we looked at how inflation expectations would change if monetary policy evolved from inflation targeting to price-level targeting. The results suggest that expectations do adapt to a change in regime. However, the subjects’ behaviour revealed only incomplete understanding of the implications of price-level targeting.19 These experiments constitute a useful starting point and can be extended to investigate many more questions, including how central bank communications influence people’s decisions or the tendency people have to extrapolate the present into the future.
I would like to conclude with the following observation.
I have argued that the uncertainty we have about how we think has important policy implications. But we should not forget a fundamental lesson from rational expectations. The way we think is not set in stone. People learn and eventually adapt. Even if people are constrained by their cognitive ability and a hardwired need for simple rules of thumb, effective communication and greater common knowledge can override some unconscious biases; make it possible to switch to still simple, but better, rules of thumb; learn more quickly; make more informed decisions; and, ultimately, reach better outcomes. A better understanding of expectation formation and effective communications can positively reinforce each other. This is not only true for monetary policy, but for decision making in general.
This is why, even though I am not sure how you think, I’m sure you expect me to be done just about now. And you are right.
Thank you.
Adrian, T. and H. S. Shin. 2009. “Money, Liquidity, and Monetary Policy.” Federal Reserve Bank of New York Staff Report No. 360.
Ainslie, Gorge W., “Picoeconomics,” Cambridge, UK: Cambridge University Press, 1992.
Akerlof, George A & Yellen, Janet L, 1987. "Rational Models of Irrational Behavior," American Economic Review, American Economic Association, vol. 77(2), pages 137-42, May.
Amano, R., T. Carter, and D. Coletti.  2009.  “Next Steps for Canadian Monetary Policy.” Bank of Canada Review, Spring.
Amano R. and M.  Shukayev. 2010. “Monetary Policy and the Zero Bound on Nominal Interest Rates.” Bank of Canada Review, Summer.
Amano R., J. Engle-Warnick, and M. Shukayev.  2011. “Price-Level Targeting and Inflation Expectations: Experimental Evidence,” Forthcoming Bank of Canada working paper.
Ambler, S.  2009.  “Price-Level Targeting and Stabilization Policy: A Review.” Bank of Canada Review, Spring.
Athey, S., A. Atkeson, P. Kehoe. 2005. "The Optimal Degree of Monetary Policy Discretion," Econometrica 73 (5), September, 2005, 1431-1476.
Barro, Robert J.; Gordon, David B. (1983). "A Positive Theory of Monetary Policy in a Natural Rate Model". Journal of Political Economy 91 (4): 589–610.
Bikhchandani, Sushil; Hirshleifer, David; Welch, Ivo (1992). "A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades". Journal of Political Economy 100 (5): 992–1026.
Boivin, J., M. Kiley, F. Mishkin, How Has the Monetary Transmission Mechanism Evolved Over Time? In: Benjamin M. Friedman and Michael Woodford, Editor(s), Handbook of Monetary Economics, Elsevier, 2010, Volume 3, Pages 369-422.
Borio, C. and H. Zhu. 2008. “Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?” BIS Working Paper No 268.
Carney, Mark. 2010. “Living with Low for Long,” Remarks at Economic Club of Canada, 13 December 2010, Toronto, Ontario.
Clarida, G., J. Gali and M. Gertler (1999), "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, 37(4), 1661-1707.
Clinton, K. and M. Zelmer. 1997. “Constraints on the Conduct of Canadian Monetary Policy in 1990s: Dealing with Uncertainty in Financial Markets,” Technical Reports 80, Bank of Canada.
Côté, A. 2007. “Price-Level Targeting.” Bank of Canada Discussion Paper No. 2007-8.
Dorich, J. 2009. “Forward-looking versus backward-looking behavior in inflation dynamics: a new test.” Bank of Canada manuscript.
Dorich, J., Mendes, R. and Y. Zhang. 2011. “Introducing Multiple Interest Rates in ToTEM.” Bank of Canada Review, Summer 2011.
Eggertsson, G. and M. Woodford. 2003. “The Zero Bound on Interest Rates and Optimal Monetary Policy.” Brookings Papers on Economic Activity 1: 139–211.
Friedman, Milton. 1968. "The Role of Monetary Policy". American Economic Review (American Economic Association) 58: 1–17.
He, Z., “Evaluating the Effect of the Bank of Canada’s Conditional Commitment Policy” (Discussion Paper No. 2010-11, Bank of Canada, 2010).
Hoffrage, Ulrich (2004), "Overconfidence", in Rüdiger Pohl, Cognitive Illusions: a handbook on fallacies and biases in thinking, judgement and memory, Psychology Press.
Kahneman, Daniel (2003). "Maps of bounded rationality: psychology for behavioral economics". The American Economic Review 93 (5): 1449–75.
Kahneman, Daniel, Jack Knetsch, and Richard Thaler (1986). “Fairness as a Constraint on Profit: Seeking Entitlements in the Market.” American Economic Review, 76, 728–741.
Keynes, John M. The General Theory of Employment, Interest and Money, London: Macmillan, 1936, pp. 161-162.
Krugman, Paul R. 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
Kryvtsov, O., M. Shukayev and A. Ueberfeldt.  2008.  “Adoptiong Price-Level Targeting under Imperfect Credibility: An Update.” Bank of Canada Working Papers 08-37.
Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
Laibson, D., 1997. “Golden eggs and hyperbolic discounting,” Quarterly Journal of Economics 112, 443–478.
Lavoie, C. and S. Murchison. 2008. “The Zero Bound on Nominal Interest Rates: Implications for Monetary Policy,” Bank of Canada Review, Winter 2007-2008.
Lord, Charles G.; Ross, Lee; Lepper, Mark R. (1979), "Biased assimilation and attitude polarization: The effects of prior theories on subsequently considered evidence", Journal of Personality and Social Psychology (American Psychological Association) 37 (11): 2098–2109.
Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
Luchins, Abraham S.  The Order of Presentation (1957) Hovland, C. I.  New Haven: Yale University Press.
Macklem, T. 2011. “Global Financial Reform: Maintaining the Momentum,” Remarks at the G-20 Workshop, 7 July 2011, Paris, France.
Murchison, S. 2011. “Consumer Price Index Targeting,” forthcoming Bank of Canada Working Paper.
Murchison, S. and Andrew Rennison (2006), "ToTEM: The Bank of Canada.s New Quarterly Projection Model," Bank of Canada Technical Report No. 97.
Murray, John. 2010. “Re-examining Canada’s Monetary Policy Framework: Recent Research and Outstanding Issues,” Remarks at Canadian Association for Business Economics, 24 August 2010, Kingston, Ontario.
Phelps, Edmund S. (1968). "Money-Wage Dynamics and Labor-Market Equilibrium". Journal of Political Economy (Chicago University Press) 76: 678–711.
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1.    Keynes (1936). [←]
2.    For instance, the Dow Jones Index dropped by 5.5 per cent and 4.6 per cent on 8 and 10 August, respectively, followed by pick-ups of 4.0 per cent and 3.9 per cent on 9 and 11 August. [←]
3.    Woodford (2003) emphasized the importance of “managing” the public’s expectations through systematic monetary policy. Boivin, Kiley and Mishkin (2010) showed that changes in the behaviour of monetary policy in developed countries have anchored inflation expectations better and significantly changed the transmission of shocks to economic activity and inflation. [←]
4.    Bank of Canada, Monetary Policy Report, April 2009. The Annex to this report describes the Bank of Canada’s approach to and the principles surrounding the conduct of monetary policy when the overnight interest rate is at the effective lower bound. [←]
5.    Evidence suggests that the Bank of Canada’s forward-guidance lowered Canadian interest rates out the yield curve relative to what their historical relationship with inflation and unemployment rates would imply. See He (2010). [←]
6.    Kydland and Prescott (1977); and Barro and Gordon (1983). For more recent contributions, see Clarida, Galí and, Gertler (1999); and Athey, Atkeson and Kehoe (2005). For a discussion of challenges involved in trying to build credibility in the early days of inflation targeting in Canada see Clinton and Zelmer (1997). [←]
7.    For instance, they are the basis of both the Friedman (1968) and Phelps (1968) hypotheses on the absence of the long-run trade-off between inflation and real activity, and the Lucas critique (Lucas 1976). [←]
8.    The concept of “bounded rationality” (i.e., in making decisions, people are limited by the amount of information they have or can process, by the amount of time they need to make a decision or by other limitations of their minds) was introduced by Herbert Simon (1955) and further developed by Tversky and Kahneman (1974). See also Kahneman (2003). Sims (2010) reviews the literature on rational inattention. [←]
9.    Kahneman, Knetsch and Thaler (1986); Akerlof and Yellen (1987); Rotemberg (2010, 2011). [←]
10.    Tversky and Kahneman (1974). [←]
11.    Hostile media effect: Vallone, Ross, and Lepper (1985); hyperbolic discounting: Ainslie (1992) and Laibson (1997); anchoring: Tversky and Kahneman (1974); confirmatory bias: Lord, Ross and Lepper (1979); overconfidence effect: Hoffrage (2004); bandwagon effect: Bikhchandani, Hirshleifer and Welch (1992); status quo bias: Samuelson and Zeckhauser (1988); primacy and recency effects: Luchins (1957). [←]
12.    For a recent review of research on price-level targeting see Côté (2007); Amano et al. (2009); Ambler (2009) and Murray (2010). [←]
13.    Krugman (1998), Svensson (2001), Egertsson and Woodford (2003), Lavoie and Murchison (2008), Murchison (2011). Amano and Shukayev (2010) provide an overview of implications of the zero bound on nominal interest rates for monetary policy. [←]
14.    Price-level targeting leads to smaller welfare gains than inflation targeting if the fraction of backward-looking agents is larger than half, see Steinsson (2003); and Ambler (2009). Dorich (2009) provides a review of the literature estimating backward-looking rule-of-thumb price-setting behaviour. [←]
15.    Kryvtsov, Shukayev and Ueberfeldt (2007) examine the desirability of switching to price-level targeting if imperfect credibility caused the private sector to be slow in adjusting their inflation expectations under the new policy regime. They find that when imperfect credibility lasts for more than 10 quarters, the cost of switching to price-level targeting outweighs the benefits. [←]
16.    Macklem (2011) reviews G-20 efforts and achievements toward a more resilient financial system and the challenges related to oversight and regulation. [←]
17.    Carney (2010) discusses the factors that have led to a low interest rate environment in major advanced economies and the implications for financial stability and economic growth. Borio and Zhu (2008) discuss the need to incorporate the risk-taking channel in monetary policy analysis, including that of extrapolative expectations. Sims (2008) argues that rational inattention and differences of opinion in expected inflation can generate excess investment in real capital. See also Adrian and Shin (2009). [←]
18.    ToTEM is the Bank of Canada’s principal projection and policy-analysis model for the Canadian economy. It is a medium-scale, open-economy, dynamic-stochastic general-equilibrium (DSGE) model with multiple goods. See Murchison and Rennison (2006); and Dorich, Mendes, and Zhang (2011). [←]
19.    Amano, Engle-Warnick and Shukayev (2011). [←]

Source: Bank Of Canada

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Using payments to streamline everyday transport



Using payments to streamline everyday transport 1

By Venceslas Cartier, Global Head of Transportation & Smart Mobility at Ingenico Enterprise Retail

Once upon a time the only way to get from A to B on public transport was with cash – and likely a pre-paid ticket bought from a physical office. Nowadays, thanks to technological developments, options range from contactless and mobile payments, to in-app tickets and more. As payment methods advance, consumers and merchants are naturally moving towards Mobility as a Service (MaaS) systems, integrating various forms of transport services into a single mobility service, accessible on demand.

This move towards MaaS does not only streamline the consumer experience, it has other positive impacts too. Incentivising public transport use reduces environmental pollution, improves mental wellbeing by reducing travel-related stress, and aids productivity by freeing up time otherwise spent driving. With this in mind, let’s take a look at the current trends affecting the transport sector, as well as how payments can optimise transportation for both operators and consumers alike.

Optimising transport with payments

The payment process is integral to any service. A payment service provider (PSP) can provide a range of key benefits to operators by proving a gateway to the transportation open payment ecosystem, and ensuring they meet objectives in 3 key areas.

  1. Environmentally, by reducing the use of personal cars and alleviating pollution and congestion.
  2. Societally, making urban mobility more inclusive in terms of improving access to all areas and for all socioeconomic classes.
  3. Economically, by optimising investment in eco-structure and fostering financial transactions, therefore improving the wealth of the city.

Payments professionals’ expertise and technological solutions can make payments easy again for transport operators. They can provide a range of options so that the customer can choose which one is right for them, leveraging the capabilities of the mobility services’ infrastructure (contactless, mobile wallets, P2P, closed-loop, QR code, and blockchain).

Furthermore, they can help promote inclusion and sustainable urban development. For example, methods such as prepaid virtual cards, or mobility accounts linked to a prepaid account can reduce the risks of excluding the unbanked. The environmental impact per kilometre can also be reduced, along with the use of vehicles with lower emissions per person per kilometre.

Finally, PSPs can put merchants’ minds at ease, providing payment liability, allowing aggregation of all due amounts from all mobility service providers, and collecting payments in one single transaction from users while dispatching revenue between mobility service providers.

Managing coronavirus

Venceslas Cartier

Venceslas Cartier

COVID-19’s disruption to the travel industry cannot be overlooked. In fact, research suggests that public transit ridership is down 70% across the globe since the onset of the virus, longer distance travel has seen reductions of up to 90%, and payment by cash has seen a 60% drop.

Being realistic, these behavioural shifts are unlikely to revert anytime soon, so it’s important for merchants to keep this in mind when thinking about payment methods. More than 70% of consumers and travellers say they are likely to avoid the use of cash over the next six months. As a result, more than 40 countries have already raised their contactless payment threshold, further helping consumers to avoid contact with frequently touched pin pads.

However, the pandemic has only accelerated the way things were heading already and highlighted the benefits. Within the context of the pandemic, transportation needs to reinvent itself and adapt its processes to suit the shift in commuter habits that we’ve already seen and will continue to see in the future.

Other trends to keep an eye on

Contactless has been steadily growing on the transport scene, as have mobile payments and in-app purchases. In fact, the recent move to mobile and online ticketing is the most promising method so far, having seen significant growth in the last few years and having been accelerated by COVID-19 as discussed above. Once consumers move to these easy, convenient, and seamless methods, it’s rare that they revert – so it’s a good idea for operators to think how they can cater to these preferences.

Speed and convenience are a must for busy travellers – but not at the expense of data security. Finding the right payments partner is therefore crucial so operators can safeguard their customers’ personal data, while also keeping on top of other security regulations/features such as P2P encryption, PCI certification, and tokenisation.

Next steps for operators

Public transport is essential for many peoples’ everyday lives – COVID-19 or no COVID-19. As such, mobility service providers can make a great difference to their service and operations by implementing the right solutions.

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Grey skies ahead – Malta prepares for a gloomy 2021 if they can’t tackle financial crime



Grey skies ahead – Malta prepares for a gloomy 2021 if they can’t tackle financial crime 2

By Dhanum Nursigadoo, ComplyAdvantage

With the summer drawing to a close, many countries who rely significantly on warm weather tourism will be assessing the impact of Covid-19. Being a small island in the middle of the Mediterranean you would expect Malta to be taking a significant economical hit – just like we are seeing in other popular European holiday destinations – but this doesn’t take into account the strength of the Maltese economy.

Emerging from the eurozone crisis with one of the most dynamic economies strategically positioned between three continents, Malta has had one of the lowest unemployment rates in the EU and has recently seen its GDP growth expand year-on-year.  But perhaps the most important aspect of the Maltese economy has been its attraction for foreign businesses with only a 5% tax on profits. It is no secret that Malta is a tax haven, probably one of the most effective tax havens in the world.

But you can’t pick and choose who takes shelter, and it’s no secret that money launderers have been taking advantage of the regulatory landscape in this archipelago.

The conditions of a tax haven suit criminal enterprises, who can take advantage of the opaque environment and blend their illegal activities with the same operations enjoyed by high net worth individuals and corporations who are looking to reduce their tax bill. And last year Malta’s keenness for secrecy and avoidance resulted in a damning report by Moneyval – the Council of Europe’s Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) body – which found that while the nation had made some efforts to curb money laundering there was still much to be desired in order to bring the tax haven up to standard. Overall, they were of the opinion that Malta viewed combating money laundering as a non-priority and this resulted in branding Malta with low to partial ratings for 30 out of the 40 Financial Action Task Force (FATF) recommendations.

The findings of the report were stated to have the potential to “create within the wider public the perception that there may exist a culture of inactivity or impunity”. This follows on from a series of international high-profile stories regarding Malta and financial crime. Most shocking was the murder of journalist Daphne Caruana Galizia – who investigated corruption and money laundering in her native country – and was killed by a car-bomb three years ago leading to international outrage and condemnation.

Now Malta is in a race against time to turn their reputation around or they will suffer genuine consequences. The FATF have threatened to place Malta on a “greylist” of high-risk jurisdictions unless they have shown a genuine commitment to combatting financial crime and implemented the recommendations of the Moneyval report. If they fail, this would make Malta the first EU country to make the list and join others such as Panama, Syria and Zimbabwe.

The pandemic has actually given Malta more time to meet these obligations, and it has been widely reported that an initial summer deadline has now been moved to October due to the widespread disruption.

As we head into the autumn, there are signs that Malta has begun to take action. The Malta Financial Services Authority (MFSA) has created and established an empowered AML now headed up by Anthony Eddington, formerly of the UK’s Financial Conduct Authority and who has previous experience of tackling anti-financial crime at Deutsche Bank. This team has already begun working closely with international experts, specifically partners in the US through the US embassy in Malta and the United States Commodities Futures Trading Commission (CFTC). In May this collaboration led to 25 new cases focused on money laundering in particular, and with plans to increase standard inspections and on-site investigations into businesses in Malta, it appears there is a change to the country’s priorities.

Importantly, the report highlighted a problem for countries that choose to become tax havens. In some cases it was not that the Maltese authorities deliberately turned a blind-eye, but simply that they did not have the necessary knowledge to effectively tackle financial crime in the first place. Law enforcement appeared unable to even recognise when crime was occurring.

But this blurring of financial compliance will not help businesses if Malta does indeed become “greylisted” this year. While not as devastating as being blacklisted (the two occupants of this list are Iran and North Korea) there are significant detrimental effects to being put on the FATF greylist. Although this signals that the country is committed to developing AML/CFT plans (unlike the blacklist) it still sends out a warning signal to the world that this is a high-risk area, with the country in question subject to increased monitoring and potential sanctions from the IMF and the World Bank. Make no mistake, being put on the greylist will be catastrophic for Malta’s economy.

It remains to be seen how the work to avoid such a calamity will affect Malta’s tax haven status. Perhaps with an increased fight against financial crime there will be less ability to defend one of Europe’s most competitive tax regimes. But if Malta does not show they are genuinely committed to tackling this problem, then the pandemic disruption to the island’s tourism may be minor in comparison to the grey clouds that now approach their shores.

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How will the UK prepare a supply chain for the distribution of the Covid-19 vaccines?



How will the UK prepare a supply chain for the distribution of the Covid-19 vaccines? 3

By Don Marshall, Marketing role at Exporta.

The challenge of mobilising a supply chain for the introduction of a global and nationwide vaccine will be enormously complex. The process will be costly, and it’s likely the figures will stretch to the hundreds of millions for both the production of the vaccine itself and its distribution across the UK. We must prepare and plan a supply chain strategy to ensure it reaches those most in need in a timely and safe manner.

The task of immunising a whole population is something that has never been planned or likely imagined by anyone within a standard supply chain. A supply chain that goes directly from the manufacturer to the end consumer, or user/ patient in this case, is complex and goes beyond the scope of any single logistics company. It would have to be conceived and delivered via a large joint effort and collaboration between multiple organisations. Effectively distributing the vaccine will depend on the source of manufacture, its storage requirements, and protection of the vaccines from manufacture through to patient administration.

The majority of vaccines require storage within a specific temperature range and need to be handled safely and in hygienic conditions. Depending on where the vaccines are manufactured, the transport legs will vary; if they are coming from overseas, air freight will increase cost and complexity. In addition to supplying the vaccine, syringes, needles and containers also need to be taken into account when preparing the supply chain.

Securing the specific types of boxes or containers i.e. the lidded containers normally used for transporting pharmaceutical products will mean acquiring them from all available stockists and manufacturers. Delivery vehicles would then need to be considered, with temperature-control factored in. The medical supply chain can inform their approach to distribution by assessing data from previous supply chains, and how large quantities of vaccines have been sent out in the past. Collating successful vaccine delivery examples from other parts of the world would be advantageous here, the more we can do to prepare for a logistical challenge of this magnitude, the better.

The distribution of this COVID vaccine will be unique in its scale and for that reason, additional supply chains will need to be mobilised. Apart from medical supply chains, those best suited for this type of transportation are the fresh/frozen food industries and supermarkets. I would mobilise these businesses to assist with the vaccine’s distribution wherever possible and use their car parks and facilities for the temporary medical centres needed to administer the vaccine to the public.

Using the food industry and supermarket networks would leave the current pharmaceutical supply chains intact for health services, pharmacies and the NHS. It would protect those vital services and continue to serve communities across the UK. Inevitably, it would place a short term strain on food supply chains, but these are supply chains that are well-equipped and versed in coping with excess demand i.e. the spike endured from the brief spell of public panic buying at the start of the crisis. With adequate resourcing and planning, I believe the UK supply chain can and will handle this challenge.

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