Real Interest Rate Shock, Labour Productivity and the 6 per cent Inflation Threshold

Abstract

This chapter tests the hypothesis that lower real interest rates lead to weaker labour productivity growth. Evidence shows that a positive (increase) real interest rate shock increases labour productivity growth. But the impact of real interest rates has changed since the global financial crisis. For instance, a positive real interest rate shock post-2008 has a weaker impact on labour productivity growth than a similar shock that increased labour productivity pre-2008. Post-2008 positive real interest rate shocks did not have a significant effect on labour productivity growth. This implies that low and even negative real interest rates post-2008 may have contributed to low productivity growth. In addition, a positive real interest rate shock significantly increases labour productivity growth when inflation is below 6 per cent inflation threshold.