Tight monetary policy can scar economy, SF Fed research finds

Central banks may not be able to undo effects on productivity and potential output, paper says

The Federal Reserve Bank of San Francisco
The Federal Reserve Bank of San Francisco
Photo: Shell Jiang

Strict monetary policy can reduce an economy’s productivity and potential output, according to research published by the Federal Reserve Bank of San Francisco.

“Tight monetary policy can reduce potential output even after a decade,” write the researchers.

By contrast, loose policy does not appear to raise output, they find.

“A central bank might not be able to undo the long-run effects on the economy’s potential by running the economy hot,” they write. “Conventional wisdom implies that

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