Labor Force Participation and Monetary Policy in the Wake of the Great Recession

December 16, 2013

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Format: Chicago

Christopher J. Erceg, and Andrew Levin. Labor Force Participation and Monetary Policy in the Wake of the Great Recession, (USA: International Monetary Fund, 2013) accessed December 3, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

In this paper, we provide compelling evidence that cyclical factors account for the bulk of the post-2007 decline in the U.S. labor force participation rate. We then proceed to formulate a stylized New Keynesian model in which labor force participation is essentially acyclical during “normal times” (that is, in response to small or transitory shocks) but drops markedly in the wake of a large and persistent aggregate demand shock. Finally, we show that these considerations can have potentially crucial implications for the design of monetary policy, especially under circumstances in which adjustments to the short-term interest rate are constrained by the zero lower bound.

Subject: Labor, Labor force, Labor force participation, Labor markets, Unemployment, Unemployment rate

Keywords: BLS labor force projection, Demand shock, Employment gap, Gap vs.the employment gap, Labor force, Labor force participant, Labor force participation, Labor market, Labor markets, Monetary policy, Monetary policy rules, Participation gap, Participation gap coefficient, Proportionality factor, Unemployment, Unemployment gap, Unemployment rate, Unemployment rate gap, Vs.the employment gap, WP

Publication Details

Pages:

60
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/245
Stock No:

WPIEA2013245
ISBN:

9781484301456
ISSN:

1018-5941

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