Readers should refer to our earlier notes on rates, particularly our “toy model” for rates, which I think is simple yet instructive.

Here, we are really just thinking out aloud.

On the assumption that work from home does translate into some meaningful productivity gains, and that recent upticks in capex produce some productivity gains (labour saving investment etc), the tentative relationship to interest rates and monetary policy suggests some eventual upside to rates.


Note those comments are confined to the graph. The evidence for higher rates are all around us, including throughout our prior notes. Also note that the productivity series is noisy. There is almost no doubt that the current trend path for productivity growth is vastly higher than the -0.55% shown in the most current period. Hence why we apply the geom smoothing technique (dashed lines).

Notice, by the way, that such a graph is useful in detecting potential monetary policy errors. The sharp easing of monetary policy in the early 2000’s, at the same time that productivity growth boomed, almost certainly contributed to the excesses ahead of the GFC in 2008.

Policy was arguably far too loose.

Fast forwarding to the present, does it seem plausible that an estimate of the natural rate has fallen, over recent months, since the pandemic?

The general consensus is that policy has gotten easier, for one, certainly as rates have remained anchored and expected inflation has risen, not that such an observation answers the question. Certainly higher than May 2020, but lower over the last 6 months?


The below is probably slightly clearer, for the point we are making. You can also see our other, earlier point, that policy was arguably far too accommodative in the 2001-2006 era.


Summers, Furman, Dudley are all making that observation now.

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