Do not blame central banks for low productivity

Jeroen Blokland recently posted something on his blog about the causes of lower productivity in advanced economies. He mentioned that the drag on productivity might have been caused by the loose monetary policy of central banks. I do not think that this is the main cause of the slowdown that can be observed in the productivity numbers.

To substantiate his claim he showed the following graph that came from the recent annual report from the BIS:

The third graph shows the share of zombie firms in advanced economies. A firm is considered to be a zombie firm when the ratio between EBIT and interest expenditures is lower than 1. So now about 10 percent of the firms have profits (before taxes and interest) that are lower than their interest costs. So the conclusion of Jeroen is that central banks such as the ECB are keeping firms alive that should have died a long time ago. So should we hike the rates to restore productivity?

I do not think that we should. There are some problems that I have with the graph from the BIS.

The interest rates that firms pay for long term debt are usually fixed for several years, so one would expect that the effects of lower interest rates come in delayed. This is especially important given the fact that peripheral countries in the euro zone are included in this graph. Interest rates for companies in these countries have been a lot higher for a large part of the past decade, due to higher interest on peripheral government bonds. As these high interest rates interfered with the monetary transmission mechanism, the ECB started her bond buying program in order bring these interest rates down. This might not be an explanation for the fact that the share of zombie firms continued to increase during 2015, but is is something to take in consideration.

If we combine this point with the dire economic situation in these countries during the past decade, we should perhaps not be to hard on the fact that profit margins are low. In a bad economic situation with deflationary pressures, firms might have profit optimizing prices below the current price level. As prices are downwardly rigid, firms might not be able to set these optimal lower prices. This would logically put pressure on profit margins.
And even if the low interest rate policy has kept firms alive that should have been dead by now, I do not think that rate hikes would have boosted productivity. Then peripheral economies would have gotten an bigger hit. This would have led to even more unemployment and if people are unemployed for long enough one would expect that that too would lead to a drag on productivity.

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