SaltWire's Atlantic regional weather forecast for August 25, 2023 | SaltWireJACKSON HOLE, Wyoming - Central bank efforts to slow inflation, by raising borrowing costs and cooling demand for goods and services, may also undermine investments in innovative technologies that could make the economy stronger in the long-run, according to research presented on Friday at a Federal Reserve economic symposium.
After five years, overall economic output was about 1% lower than it would have been, a finding they regard as evidence of how a central bank's focus on curbing inflation in the short-run"could have a persistent influence on the productive capacity of the economy." Their paper was presented at the U.S. central bank's annual conference in Jackson Hole, Wyoming.
In the case of monetary tightening, however, the authors said the hit to demand may leave companies with less incentive to innovate, while higher interest rates may make safer investments more attractive and sap the sort of risk appetite that drives venture funding. But their finding is relevant in an era in which productivity has been improving only slowly and Fed officials regard the economy's underlying growth potential as limited. Improving productivity boosts growth while lowering inflation risks at the same time.
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