Real Interest Rate Shock, Labour Productivity and the 6 per cent Inflation Threshold

Abstract

This chapter tests the hypothesis that lower real interest rates lead to weaker labour productivity growth. Evidence shows that a positive (increase) real interest rate shock increases labour productivity growth. But the impact of real interest rates has changed since the global financial crisis. For instance, a positive real interest rate shock post-2008 has a weaker impact on labour productivity growth than a similar shock that increased labour productivity pre-2008. Post-2008 positive real interest rate shocks did not have a significant effect on labour productivity growth. This implies that low and even negative real interest rates post-2008 may have contributed to low productivity growth. In addition, a positive real interest rate shock significantly increases labour productivity growth when inflation is below 6 per cent inflation threshold.

 Furthermore, evidence shows gross capital inflows reduce the pass-through of the impact of positive real interest rates on labour productivity. Gross capital inflows transmit real interest rate shocks to labour productivity differently when inflation is above the 6 per cent threshold than when it is below. In policy terms, this chapter shows that monetary policy plays an important role in labour growth productivity by enforcing price stability and this affects the way in which real interest rates affect labour productivity growth and the role of capital flows.

Appendix

Fig.14.6

Labour productivity responses to real rates and the inflation threshold