And if the trend rate of productivity growth remains unchanged, this means that inflationary pressures can begin to build at a lower rate of economic growth. What should policy-makers be doing? First, we should minimize constraints on labour mobility and participation, so that there are no artificial barriers to prevent people who want to work from doing so.
For monetary policy, this implies that the policy rate that is considered neutral—where it will neither stimulate nor cool the economy because GDP is growing at its potential level, inflation is at target, and the effects of any shocks have faded—is lower than it would be otherwise.xv The lower neutral rate has important implications for monetary policy.