Can Monetary Policy Affect Economic Growth?

Economic growth is driven by factors such as technological change, population growth, and human capital accumulation. Monetary policy’s effect on real economic activity is limited and temporary, although poorly executed monetary policy can persistently impede economic growth. Monetary policy is uniquely capable of affecting the long-run price level through the process of money creation. This remains true even in an environment with interest on reserves and large bank reserve account balances. Although inflation is running below the Fed’s 2 percent target, measures of inflation expectations suggest it is likely to move back toward 2 percent over the medium term. Monetary stability is critical for economic growth. The most important contribution central bankers can make to growth is low and stable inflation.