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

61 Pages Posted: 9 Jan 2014

See all articles by Christopher J. Erceg

Christopher J. Erceg

Board of Governors of the Federal Reserve System

Andrew Levin

Dartmouth College - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 2013

Abstract

In this paper, we provide compelling evidence that cyclical factors account for the bulk of thepost-2007 decline in the U.S. labor force participation rate. We then proceed to formulate astylized 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 wakeof a large and persistent aggregate demand shock. Finally, we show that these considerations canhave potentially crucial implications for the design of monetary policy, especially undercircumstances in which adjustments to the short-term interest rate are constrained by the zerolower bound.

Keywords: Economic recession, United States, Labor markets, Unemployment, Monetary policy, labor force participation, and monetary policy rules, unemployment rate, labor force participation rate, labor supply, unemployed, natural rate of unemployment, labor demand, nairu, labor force projections, under employment, overall employment, high unemployment, labor force participation rates, labor force participants, unemployment rates, unemployment insurance benefits, aggregate employment, total employment, current labor force, female labor force, employment demand, beveridge, jobless, natural unemployment rate, incidence of unemployment, average unemployment, employment data, unemployment problem, employme

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 (December 2013). IMF Working Paper No. 13/245. Available at SSRN: https://ssrn.com/abstract=2376682

Christopher J. Erceg (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Andrew Levin

Dartmouth College - Department of Economics ( email )

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United States
603-646-8138 (Phone)

HOME PAGE: http://www.dartmouth.edu/~alevin

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