Can Central Bankers Improve Productivity Growth?

It’s tough to manage inflation, as central banks are tasked with doing—and the UK’s experience shows just how hard it can be. From 2014 through 2016, inflation in the United Kingdom remained stuck below the government’s 2 percent target. It then rose, over the course of 11 months, from 1.8 percent to 3.1 percent (a rise largely attributed to the effects of the Brexit vote), and more recently dropped to 2.4 percent.

Yet while it attempts to keep inflation at a stable and healthy rate, the Bank of England may soon have another mandate: in June, the Labour Party proposed the bank target 3 percent labor productivity growth, as well.

A dual mandate is not unheard of: In the US, the Federal Reserve is responsible for both maintaining price stability and promoting “maximum sustainable employment.” But keeping the unemployment rate low is a different challenge than boosting productivity growth, generally defined as output per worker hour, and some critics have suggested that the tools available to central bankers are ill-suited to influencing the latter.

Can monetary policy raise productivity growth? To find out, Chicago Booth’s Initiative on Global Markets asked its American and European panels of economic experts—and both groups answered resoundingly in the negative. Among US panelists, 72 percent agreed that “central banks cannot significantly increase productivity growth over a 10-year horizon, except perhaps by promoting macroeconomic stability,” with the remainder of respondents expressing either uncertainty or no opinion. Seventy-three percent of European panelists agreed with the statement; no members of either panel disagreed with it.

US Panel

Daron Acemoglu, MIT
“Overreliance on monetary policy for achieving productivity growth has huge downside.”
Response: Agree

Austan Goolsbee, Chicago Booth
“They shouldn't have a target rate of productivity growth, climate change, or Cubs wins. Each one matters. None is under their control.”
Response: Strongly agree

Richard Thaler, Chicago Booth
“Brilliant idea! Maybe the Fed can increase my productivity, too. I’d like to be able to write faster and better. Also hit golf balls farther.”
Response: Strongly agree

European Panel

Agnès Bénassy-Quéré, Paris School of Economics
“Recent studies have suggested a link between monetary conditions and productivity growth. However this is still much discussed.”
Response: Agree

Lubos Pastor, Chicago Booth
“Just like drinking coffee cannot make you more productive in the long run.”
Response: Strongly agree

Christopher Pissarides, London School of Economics
“Productivity growth depends on technology, infrastructure, and the like. Monetary policy has nothing to do with it.”
Response: Strongly agree