Economists tend to think of central-bank interest rates purely in terms of their effect on macroeconomic benchmarks such as inflation, output and unemployment. The Federal Reserve’s dual mandate, for instance, directs it to seek stable prices and maximum employment. Mainstream macroeconomic models, such as the dominant New Keynesian models used by most central banks, support this view. Occasionally, economists or financial commentators will add asset prices to the list, warning that low rates will cause financial instability or calling for the Fed to cut rates to boost the stock market.
In contrast, very few economists think about central-bank interest rates in terms of their long-term impact on growth. Typically, growth is thought to result from factors outside the central bank’s control — the march of technology, government regulation, taxes or other structural factors. That leads to a neat separation of responsibilities: the Fed handles macroeconomics, while Congress handles the micro. But it’s possible that this division of labor is fundamentally mistaken, and that interest rates can have a substantial and direct — and not always positive — effect on long-term productivity growth.