More  11  The impact on the physical capital stock would be compounded to the extent that the recession also weighed on the growth in human capital. In particular, employees ability to “learn by doing” on the job or through job related training is likely to have been reduced as a result of the decline in average hours during the recession. Weale (2010) suggests that the learning by doing channel could eventually reduce aggregate labour productivity by around ½%. 12  “Investigating the characteristics of patents and the businesses which hold them”, Thomas, A., Economic and Labour Market Review, April 2011  BIS central bankers’ speeches  5  generally, the amount of management time devoted to raising finance and managing banking relationships has increased very substantially, diverting attention from the search for new products and new markets. It is impossible to quantify with any precision the effect that strains within the banking system have had on the growth of productivity over the past few years. But evidence from previous periods of financial turmoil suggests that the effect might be material. In particular, research by the IMF suggests that persistent falls in TFP growth following banking crises can account on average for around one third of the loss of output seen following such episodes (IMF 2009). So where does all this leave us? As I warned you upfront, I don’t think there is a single, simple explanation for the recent surprising weakness of productivity. Some of it may well get revised away.
The so-called Great Stability of the past decade has bestowed on the MPC the great gift of credibility – a golden halo which eluded monetary policy-makers in the UK for most of the twentieth century. What part has the MPC played in its own success? It’s difficult to say. But it is hard to believe that luck played no role. My own view is that the MPC has benefited from a virtuous circle. As we have kept inflation close to target, people have increasingly come to expect us to do so in the future, and to act on the assumption that inflation will stay low. These expectations have underpinned the wages they have bargained for, and the prices they have set. And that behaviour has helped us to keep inflation under control in the face of destabilising events. However, the unusual degree of stability, and the prestige it has conferred on central bankers, may also have bred some less helpful attitudes: such as complacency about the ease with which the economy can absorb shocks, and unrealistic expectations about what monetary policy can achieve. Just to be clear: monetary policy can pin down average inflation over the medium term. It can not deliver inflation at target at all times and in all circumstances, and certainly not in combination with rock-steady growth in output. Let me illustrate these points by looking more closely at one of the key challenges I mentioned earlier, the impact of higher energy prices over the past two years.