minouche shafik : “ passthrough efficiency in the fed ’ s new monetary policy setting ” remarks by ms minouche shafik, deputy governor for markets and banking of the bank of england, as a discussant of “ passthrough efficiency in the fed ’ s new monetary policy setting ” by mr darell duffie and mr arvind krishnamurthy, at the federal reserve bank of kansas city economic symposium “ designing resilient monetary policy frameworks for the future ”, jackson hole, wyoming, 26 august 2016. * * * accompanying charts can be found at the end of the speech or on the bank of england ’ s website. i would like to thank grellan mcgrath for assistance in preparing these remarks. introduction thank you for the opportunity to discuss this paper, which brings together many of the themes of this timely and important conference. interest in the pass - through of central banks ’ policy rates has enjoyed something of a resurgence in recent times, as the federal reserve begins to tighten policy in the presence of a vast amount of reserves created by quantitative easing, and as other central banks loosen further by moving their policy rates to new record lows. of course the bank of england is in the latter camp. this month the monetary policy committee ( mpc ) – of which i am a member – voted to introduce a package of measures to support the necessary adjustments of the uk economy as it responds to the decision to leave the european union. this package included a reduction in bank rate to a new low of 0. 25 %, and the launch of a term funding scheme to reinforce the pass - through of this cut, alongside a £60bn increase in our stock of uk government bonds and the purchase of up to £10bn of investment grade non - financial corporate bonds. as central bankers and money market enthusiasts know, the issue of pass - through is of utmost importance. the paper begins with the premise that a necessary condition for competitive money markets is that any change in the fed ’ s policy rate is passed through, one for one, to all market transaction rates. in truth, one can make the much broader statement that the very efficacy of monetary policy and its usefulness as a tool for influencing the economy is premised on the pass - through of changes in policy rates to money market rates. and that ’ s why some of us have endless appetite to discuss any wedge between them. with that in mind, i ’ d like to pick up

( tfps ) of 23 eu economies since 1998. countries in europe grow at different speeds. they also appear to belong to different convergence clubs2. even among central european economies, more than one convergence club could be discerned. 1 / 3 bis - central bankers'speeches for example, hungary and the czech republic appear to belong to one club, while poland, lithuania, and latvia belong to another ; the members of the two clubs are converging to different points of tfp if they continue their current trajectories. furthermore, lietuvos bankas, in its 2020 study on convergence, estimated that lithuania would have needed a tfp of more than 30 % higher over the past 20 years to catch up with the tfp levels of the original eu member states of germany, france, or belgium, who belong to a club of their own. this challenges the convergence measurement itself because convergence in terms of tfp is not straightforward. countries belonging to different convergence clubs appear to be experiencing convergence at the level of their club – a concept that is not equivalent to the overall convergence within the eu. what is puzzling is that when we focus solely on convergence in terms of gdp, we find evidence that such convergence is happening. for example, over the past decade lithuania's gdp per capita rose to 87 % of the eu average. the other two baltic states also boasted robust convergence rates in terms of gdp convergence. but when we look at productivity – and, in my view, productivity is the key driver of growth – the picture changes. data shows substantial productivity variation within europe. labour productivity growth is uneven, and we can see evidence that the central european region was growing considerably faster in the first decade of the 21st century than in the following decade. this is a gravely worrisome trend, especially when discussing convergence. the productivity debate usually ends with prescriptions like " increase investments " and " implement structural reforms ". today, however, i hope that panelists will share their thoughts on the economic model of central europe in general. have we reached the limit of what can be achieved without undergoing a fundamental transformation of how we do things? will automation and immigration provide the impetus for this region to grow and prosper? with all this in mind, i would like to move to the institutional side and its effects on convergence. institutions undoubtedly play a significant role in determining countries'overall economic success. the question remains as to which institutions have the greatest impact on convergence and through what