In a speech delivered today, at noon, at Durham Business School, Ben Broadbent, External Member of the Bank of England's Monetary Policy Committee (MPC), has argued against "technical regress."

If we understand him correctly, he seems to refute the idea put forward recently by some economists that the financial crisis and changes in the economy have led to a degree of technical regression or a fall in levels of demand and supply for the output from high productivity sectors.

Thus, for him, "a combination of uneven demand (across sectors) and an impaired financial system, one that is unable to reallocates capital resources sufficiently quickly to respond to such shocks, is enough to reduce aggregate output per employee." That is to say, hence, the fall observed in productivity growth.

He infers the above from the "spread of profits across the economy, especially when compared with the relative stability of wage spreads," which suggests problems in the allocation of capital specifically.

Even more interestingly, he adds that: Indeed, at some point, once the financial system returns to health, one could imagine exactly the reverse process: a long period of above-trend productivity growth."

Implications


What are the implications for monetary policy? In his own words: "First, we should set policy not just on its ability to affect demand but its capacity to improve the flow of finance in the economy as well...If, as the MPC expects, the Funding for Lending Scheme helps to promote the supply of finance across the economy it's likely it will also improve its allocation.

"[Second, policymakers] should probably pay less attention (than we normally do) to movements in output and relatively more to changes in employment", noting that "...the relationship between employment and inflation has proved more stable through the crisis than those between either of those variables and output."

This is what analysts at Barclays Research had to say about Mr.Broadbent's speech: "Mr Broadbent was one of two MPC members who did not support the QE expansion in July, and so is currently dubbed a hawk. His emphasis on the relative strength of employment, and the possibility that weak productivity is as much a supply-side issue as one of demand, suggest he remains sceptical about the need for further monetary loosening. We would not expect his dissention to prevent further QE at the November meeting, however."




AB

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