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

56 Pages Posted: 30 Sep 2013

See all articles by Christopher J. Erceg

Christopher J. Erceg

Board of Governors of the Federal Reserve System

Andrew T. Levin

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: September 2013

Abstract

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.

Keywords: labor force, policy tradeoffs, simple rules, unemployment rate

JEL Classification: E24, E32, E52, J21

Suggested Citation

Erceg, Christopher J. and Levin, Andrew, Labor Force Participation and Monetary Policy in the Wake of the Great Recession (September 2013). CEPR Discussion Paper No. DP9668. Available at SSRN: https://ssrn.com/abstract=2333586

Christopher J. Erceg (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2575 (Phone)
202-736-5638 (Fax)

Andrew Levin

affiliation not provided to SSRN

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