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Complaining about central bankers pressuring borrowers is a bit like complaining that weight-loss drugs make your face look gaunt. A pinched appearance is part of the process. Officials at the Federal Reserve, Bank of England and European Central Bank are certainly showing no signs of regret as they near the end of their tightening cycles. Even if they went too far and ended up ruining the economy, the legend of central banks goes, any short-term problems should eventually subside. A comforting thought – but one that is increasingly being questioned.

The conventional wisdom is that while monetary policy makers can boost or weaken an economy in the short term, they are fairly powerless over longer periods of time. If expectations adjust, attempts to stimulate the economy with cheap money will end in tears and inflation. “You cannot permanently enrich a country simply by issuing more banknotes,” Bank of England deputy governor Ben Broadbent said last October. If you want real effects, you have to change real things.

Over the decades, economists have grappled with this core assumption. In the 2010s, sluggish productivity growth fueled suspicions that policymakers were naive about their own power. Luca Fornaro of the Barcelona School of Economics and Martin Wolf of the University of St. Gallen theorized this year that higher interest rates hinder innovation and slow potential growth by raising the cost of capital and dampening expected demand.

Showing that something is possible in a model is easier than proving it with data. This is particularly true when there is not much data and the available data is subject to uncertainty. Central bankers change interest rates in response to the changing macroeconomy. How then can one be sure that the weak growth a decade later is really due to monetary policy and not to what it responded to?

A few newer items were tried. The first study comes from three economists at the Federal Reserve Bank of San Francisco and examines countries that have historically pegged their exchange rates. These economies effectively absorb monetary policy shocks from abroad. This means that you can be more confident that any subsequent changes are independent of developments in your own country.

The researchers estimate that 12 years after an interest rate increase of one percentage point, total factor productivity falls by 3 percent, the capital stock by 4 percent and the gross domestic product by 5 percent. Interestingly, the result is asymmetrical; While tight money hurts, loose money doesn’t seem to stimulate the economy in the long run. And they conclude that other studies using different methods would have found (smaller) long-term effects of monetary policy if they had only looked.

The claim that monetary contractions are slowing investment in research and development, which is hindering growth, is supported by another paper by Yueran Ma of the University of Chicago and Kaspar Zimmermann of the Frankfurt School of Finance & Management, presented in Jackson Hole . They find that three years after a one percentage point increase in interest rates, research and development spending falls by 1 to 3 percent, venture capital investment falls by a quarter, and patents and innovations fall by 9 percent.

One might scoff that having less money available to chase the crypto craze isn’t a bad thing. Low interest rates could even slow growth by encouraging the misallocation of resources to stupid ideas. But Ma and Zimmerman note that the key technologies often mentioned in company earnings releases, such as cloud computing and electric vehicles, are particularly sensitive to rising interest rates.

Challenging old assumptions is healthy and economists should do so often. As the evidence mounts, central bankers should also ask what this might mean for policy. For example, perhaps they should think twice about aggressively curbing inflation if it could have long-term consequences for productivity growth.

Currently, the desire to do anything other than curb inflation is almost nil. Former Fed Vice Chairman Donald Kohn explained in Jackson Hole that the Fed’s contribution to innovation is to “fulfill the dual mandate.” Being boring and stable gives companies the security they need to invest. When you start thinking about side effects, where do you stop? What happens if your interest rate causes a financial crisis?

Monetary policy is a blunt instrument and the more things it is asked to do, the worse it will perform in any case. If raising interest rates derails investment and innovation for the time being, it will be left to others to sort out the mess.

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