Haldane Pushes Bank of England to Probe Future of Cash

Andy Haldane

Andy Haldane.

Photographer: Chris Ratcliffe/Bloomberg
  • Chief Economist gives interview on BOE's research agenda
  • Says key focus is digital currencies, microprudential policies

For the chief economist at one of the world’s oldest central banks, cash might not be king.

One year after Andy Haldane and Bank of England Governor Mark Carney kicked off a research program to probe everything from inequality to climate change and digital currencies, the institution is pondering a question that could ultimately put it out of business: What is the future of money?

The topic has grown in importance as central banks drive interest rates lower, pushing them closer to the limits of conventional policy, and the rise of peer-to-peer lending and digital money threatens to overhaul finance. That also poses tricky questions for those tasked to steer the economy and regulate the financial system, like whether they will be needed if society no longer requires central banks to back currency.

“The challenge that I think is among the most important right now, it would be around the future of money,” Haldane, 48, said in an interview in his office in London. “What shape that takes and what role central banks play in shaping that.”

Haldane, known for his contrarian analysis and frisbee metaphors, is aware that his more extreme research is pushing the BOE -- where’s he’s worked for more than a quarter of a century -- far beyond its traditional comfort zone.

Existential Questions

“It’s a pretty existential question for us,” he said. “I don’t remotely know what the answer is but that’s why it’s research.”

But the analysis of money and technology isn’t completely pie-in-the-sky thinking. It comes at a time that central banks have been pushed to the limits of their power in a bid to keep demand and inflation from collapsing. The People’s Bank of China has said it’s studying the prospects of issuing its own digital currency and aims to roll out a product as soon as possible.

As policy makers at the Bank of Japan and European Central Bank embrace sub-zero rates, some officials, including Haldane, have said such policies could work better in a cashless society. As digital money moves up the international agenda, it’s also a hot topic at the BOE. Deputy Governor for Financial Stability, Jon Cunliffe, said last week it raised questions about the circulation of funds through the economy and Ben Broadbent, deputy governor for monetary policy, is due to deliver a speech on the issue on Wednesday.

Sub Zero

“With more countries moving into low, or indeed some cases negative, interest-rate territory, that has begged questions about how low you can go,” Haldane said. “There’s an important cash dimension to that, in that physical cash is one of the constraints that prevents interest rates going too low.”

Another research area that’s a future priority is microprudential tools and their interaction with broader financial-stability policies, Haldane said. Efforts to better understand the culture within banks inspired by behavioral research may also aid regulators, he said.

His comments underscore how far the BOE’s set of responsibilities has expanded. Part of Haldane’s work is to update how the institution gathers, understands and interprets data. About 20 people work in his “Research Hub” at any one time, a mixture of permanent staff and employees on rotation from other departments, and the plan is to increase that in the coming years, he said.

Big Data

With the increasing demand for information, the BOE is building new granular databases for the millions of financial market transactions that take place every day, and to capture every U.K. mortgage issued for the last several years.

In some cases, like the development of macroprudential policy, research is nascent, with Haldane drawing a comparison to the 1940s, when officials were first trying to devise modern macroeconomic strategies.

“I think of us as being in the foothills today when it comes to things like macroprudential policy and the interaction between macro and microprudential policy,” he said. “There’s a real investment to be made over the next 10 years.”

Another hot topic is the sharing economy and the growth of peer-to-peer websites like Uber and Airbnb, which may have long-term implications for the structure of the financial system and regulation, as well as inflation.

New Partnerships

“It could alter the functioning of the economy,” Haldane said. “It may mean that the rents of the middle person are whittled away. That lowers prices and improves productivity, and on the financial sector that would be lowering profitability and improving productivity.”

The BOE’s agenda has also included new research partnerships with institutions including Oxford University and Germany’s Max Planck Institute, while there’s now a staff blog, called Bank Underground, that allows economists to share analysis. That’s a mini revolution at an institution traditionally reluctant to let junior officials air views in public.

So what’s the point of it all? With the global economy in transition and still finding its feet after the Great Recession, Haldane’s work is ultimately aimed at preparing the BOE, and central banks in general, for an environment where the old models don’t quite work.

“It’s certainly been liberating for us and I think other central banks, other organizations have looked on and I hope they might seek to follow in our footsteps,” Haldane said. “This is a brave new world for us.”

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