Weak Labour Productivity, Tight Credit Conditions and Monetary Policy

Abstract

Do tight credit condition shocks impact labour productivity? Evidence in this chapter indicates that a tight credit conditions shock leads to a slowdown in labour productivity. This occurs via a large contraction in GDP growth rather than the shrinkage in total employment. In addition, the counterfactual evidence shows that elevated inflation expectations amplify the decline in labour productivity following a tight credit conditions shock. This implies that monetary policymakers should implement policies that anchor inflation expectations within the target band. The amplification of the decline in labour productivity differs depending on whether inflation exceeds 6 per cent. For instance, labour productivity declines more when inflation is above 6 per cent. Hence, we conclude that monetary policy should enforce price stability.