The link between loose monetary policy and productivity

In one of the best oped’s TAFKAS has read in a while, Warren Hogan in the AFR writes:

Many of the problems economies face cannot be solved by easy money. They are structural, so can only be remediated through adjustments to economic arrangements, such as taxation, competition, industry and trade policy.

Over the past two decades there has been a loss of perspective about what monetary policy can and cannot achieve. It is a tool to impact on demand in the economy in the short term. It cannot impact on demand over the long run nor can it influence the supply side of the economy – at least, not in a positive manner.


Easy monetary policies distort private sector decision making and ultimately reduce the productivity and efficiency of the economy.

Economies are dynamic and in a constant state of adjustment to changes in technology, preferences and regulation. While it may be desirable to smooth these transitions of labour and capital, central banks should be careful not to hobble the pace of change – or halt the process altogether.


The conduct of monetary policy has created a policy inaction bias in many countries. Central banks have let governments off the hook on politically difficulty fiscal and structural policies by boosting spending in the short term, potentially at the expense of economic activity down the track.

This piece by Hogan is absolutely and positively spot on.

Please read.

FYI, Hogan was the Chief Economist for ANZ Bank before taking up a senior role with the Commonwealth Treasury.  Perhaps seeing the writing, or Sanskrit on the wall, from Treasury he went into academia.

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13 Responses to The link between loose monetary policy and productivity

  1. bollux

    The lack of morality around the creation of money and credit has dictated the lack of morality around everything else in society. The old saying “money is the root of all evil” has never been more true than it is today.

  2. Jim of Paynes Crossing

    Hogan’s father, also Warren Hogan, was a Prof of Economics at Sydney Uni when I was pretending to be a postgrad at Sydney about 40 years ago. My supervisor was the widely feared Prof K O Campbell (Agric Economics) KO sent me to Hogan’s lectures. I enjoyed them and learned more from Hogan than I ever did from KO.

  3. Jock

    His father was a professor at Sydney during the 70s. He had to put up with communists like Ted wheelwright. Unfortunately economics lost out. It was the beginning of the real takeover of the institutions.

  4. John Bayley

    There is no such thing as “good monetary policy”.
    “Monetary policy” is a socialist oxymoron.

    It always about central planning of what are arguably some of the most important price signals in an economy.

    It will therefore always and necessarily lead to sub-optimal outcomes. Especially so when coupled with an unbacked currency, which can be created in unlimited quantities at a press of a button.

    If we had a truly free market system – yeah, I know, I’m dreaming – then all of these central banking parasites on 7-figure salaries would be surplus to requirement and would need to learn some useful skills instead to get gainful employment.

  5. Bad Samaritan

    bollux (9.01am)…..

    Let’s imagine there’s a small town motel and a traveller stops in, pays $100 for a room and he then goes on a sightseeing walk…

    The motel owner takes the $100 and rushes out to pay local glazier the $100 he owes for a window repair. The glazier then goes to the local pub and pays a hundred he owes for drinks and dinner the day before.Tthe publican takes the hundred and pays the local baker for pies, bread etc he owes. Then baker then goes to the motel owner and pays the hundred he owes for when he put his sister-in-law up at the motel two weeks earlier. All debts now settled by that single $100 bill…

    The traveller returns and says he can’t stay as planned as his wife has phoned to say their daughter is in hospita…. so the motelier gives the $100 back.

    What is immoral about any of these credit arrangements? What is immoral about the “creation” of the $100 (ie it appeared from nowhere and then disappeared again). Would it be different if the traveller didn’t take the $100 back (so’s it stayed in the town)…or if the $100 was from a Centrelink payment done with RBA printed free-money?

    Would the transactions be different if the whole chain did not exist as credit arrangements but was set in motion by the $100 landing at the motel….the $100 is used to call the glazier who then visits the pub after doing the windows and then buys the drinks and meals. The publican then goes to buy pies and stuff. The baker then goes to the motel and pays for his sister-in-laws room for next week. Everything done in cash with no credit whatsoever…

    I’m genuinely interested to read your views on all this economic activity being facilitated by the $100 “loan” from the traveller vs facilitated by the $100 “sale” to the traveller at the motel.

    Is the activity not the same?

  6. BoyfromTottenham

    Bad Samaritan – this is an old, old story, but of course is totally unrealistic because businesses have costs. So the whole $100 is not available for the hotelier to spend (as you suggest). After deducting his other costs, the motel owner may have $20 (20% of the $100 gross income) to pay the glazier, and the glazier may have $4 (20% of $20) to pay the publican, etc. I also studied economics in the 70s (UNSW), and I agree with Jock that the profession has gone downhill since, for the same reason. Sad.

  7. don coyote

    Initially, the businesses all had liabilities of $100 and assets of $100, ie zero net assets.

    After these transactions, they still have zero net assets. The wealth of the community has not changed.

  8. Entropy

    Yes and the story relies on the debts and expenses of the hotel manager not being called in. In many ways it is a metaphor for MMT. The merry go round works fine until it doesn’t.

  9. John A

    bollux #3636368, posted on October 29, 2020, at 9:01 am

    The lack of morality around the creation of money and credit has dictated the lack of morality around everything else in society. The old saying “money is the root of all evil” has never been more true than it is today.

    That’s “The LOVE OF money is the root of all kinds of evil”

    And you have the cart before the horse, my friend. The lack of morality in the whole of society has also infected monetary policy.

  10. TPL001

    Productivity has to be based on the marginal (additional) out per person over a given time period (the marginal productivity of labour [MPL], which is commensurate with wages). Braudel, in The Structures of Everyday Life, argues that a man’s output is around 4/100 of one horsepower (75kg to a height of 1 metre in 1 second). In 1739, 7 to 8 men were needed to do the same haulage of one horse; in 1800, one man could till 0.4 hectares, harvest 0.2 hectares and thresh 100 litres of grain per day. It is only by the addition of capital goods (i.e. the Industrial Revolution), and the improvement of those through technological advance, that the MPL can improve.

    Capital goods are factors of production that require a cost (as small business owners in Melbourne know only too well). There is no all flowering, ever flowing tree of capital. There is no magic money tree. Jesus was onto it, when Satan said ‘If you are the Son of God, command these stones to become loaves of bread. But he (Jesus) answered, “It is written, “‘Man shall not live by bread alone, but by every word that comes from the mouth of God.”’ (Mt 4:3-4). Mises’ article ‘Stones into Bread: The Keynesian Miracle’ ( is a nice play on that lie.

    Tinkering with the number of universally accepted exchange commodity units in the economy (e.g. Australian dollars) does not change that reality of productivity. This is where the chain of logic is difficult to follow, because there can be a number of paths to this. If nominal interest rates are forced below what they would otherwise be (based on individuals’ time preferences for present over future goods, inflation and risk), it indicates there are greater savings and a preference for future goods. Lower interest rates increase the profitability of long-term production in higher-order capital (longer-term) goods.

    If the new lower nominal rates are facilitated by increased savings, this leads to a lengthening the capitalistic structure of production, and provides more consumers’ goods from the original volume of the factors of production. It produces a higher standard of living. What we are seeing due to the state-induced lockdown is a shortening of the capital structure of production: less businesses, fewer capital goods and a decreased need for other factors, such as people => higher unemployment. But if the market rate of interest is artificially forced lower, and time preferences have not changed, and savings have not increased vis-à-vis the money supply, higher-order industries are stimulated. Savings remain the same. The corollary is credit expansion, boom, a standard Austrian trade cycle, and a bust. Credit is nothing more than a broad version of the measure of money. And an elevated level of the amount of money or credit is by definition inflationary. All that money has to go somewhere, and it goes into investment and assets and factors of production and bumps prices – hence, ‘price’ inflation – and wages in the higher-order industries are bid up, and so on and on it goes until the bust. Why? Because there is no one to buy the increased output, purportedly borne of higher savings, which were never there is the first place. It is the magic of apparently producing something out of nothing. I think it is called snake oil.

    MMT and the Keynesians neglect the relationship between time preferences and the structure of production (the abstract aspects of money and interest rates cf. the real and concrete objects of factors of production). Interest rates are not viewed by them as a price that coordinates the structure of production.

  11. Squirrel

    The completely symbolic rate cut which the RBA is likely to deliver next week, anticipated by some in the commentariat as happening on Budget day earlier this month, was hailed then as a “team Australia moment” – one of the more vacuously vomitorious (and that’s saying something) bits of spin I have ever heard.

    What the hell is the point of an expensively independent RBA if it, at best, is just a branch office for the big central banks of the northern hemisphere. A team of junior clerks in the Treasury could cut and paste the memos from the international masters and wrap them in some blather about local circumstances.

  12. Money is created as credit at the push of a button by banks mediating risk according to government regulation to (hopefully) keep things honest and balanced. However there is always more debt created than money advanced, insofar as interest is payable over time. Thus more credit needs to be created to cover the interest bill of that which was previously created, because the velocity of money is and has been less than 1 for many years. Thus the $100 small town example simply doesn’t exist in the financial world as we know it because some people are sitting on piles of cash as pretended stores of future value. At some point, when people lose confidence in artificial ‘financial products‘, and everyone wants a piece of something real instead, there will be a flood of liquidity. At that time, cash kings will be wearing the emperors’ new clothes.

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