The Future of Monetary Policy
Here’s a great piece by my old employer and my take on it below:
Now, my opinion is that Ray is painting an overly gloomy picture. Specifically, growth can occur through new inventions or new uses for old inventions. When an economic shift like this happens, we tend to see growth increase almost irrespective to the level the short term risk free rate (barring that it isn’t extremely high, for example). Our overall interest rate regime hasn’t been too much different from that of the 1990s. Yes, the yield curve was higher and steeper (which did give the central bank more room for monetary policy intervention), but the economic growth from that era was less tied to interest rates than what Ray has implied was the case over that period, and has been the case in the past 15 years.
Said another way, we may be approaching an end of a monetary policy era in which some growth can be eeked out of lowering near term interest rates or by effectively printing money, but there’s still a few drivers of economic growth that Ray didn’t acknowledge. Mainly, I’m referring to productivity. Productivity was the key source of economic growth in the late 90s. I verified this using the St. Louis Fed’s productivity data and here’s the 1 year moving average of productivity from 1947-April 2017:
As you can see, from 1994–2000, there was a steady and increasing rate of productivity growth. Then, productivity growth rates were highly volatile, but overall they fell until the economic collapse of 2007 (during which productivity growth spiked and immediately fell as a result of real output changes moreso than labor changes). Since then, they’ve been low and positive, but averaging a tiny rate of growth: Since 2014, we’ve averaged 0.20% 1 year growth in productivity changes. From 1994–2004, that same rate of growth was 0.55%.
So if we go through a similar economic revolution as the internet, which is certainly possible either via the energy sector (as costs of production continue to fall for renewable energy and as stocks of oil and natural gas are depleted) or via the technology sector (via artificial intelligence, robotics, or even things we haven’t considered), then we can experience another medium term increase in productivity growth rates.
That said, I do agree with his take that central banks will need to come up with new tools to help mitigate the volatility of the economic cycle since if we do indeed go through a period of beggar-thy-neighbor competitive devaluations, we’ll only end up hurting the global economy and increasing economic cycle swings.