Central bank interest-rate increases reduce potential economic output for at least 12 years, in contrast to traditional theories of national economies that assume policy is neutral in the long run, Federal Reserve Bank of San Francisco research found.

“We find that these long-run effects develop primarily through investment decisions that ultimately result in lower productivity and lower capital stock than would be available without policy intervention,” San Francisco Fed researchers Òscar Jordà and Sanjay R. Singh, and University of California Davis professor Alan M. Taylor said in a research note published Tuesday on the bank’s website.

“These productivity effects persist for at least 12 years following a period of monetary policy tightening.

”The economists used historical data for smaller economies that pegged their exchange rate to the currency of a bigger economy to study how components of output — labor, capital and total factor productivity — respond to externally driven interest-rate changes.

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‍Source: CNBC