Employment and the Conduct of Monetary Policy in the Euro Area

149 Pages Posted: 23 Sep 2021 Last revised: 28 Jan 2022

See all articles by Claus Brand

Claus Brand

European Central Bank (ECB)

Günter Coenen

European Central Bank (ECB)

David Sondermann

European Central Bank (ECB)

Reamonn Lydon

Central Bank of Ireland

Viktors Ajevskis

Bank of Latvia

Felix Hammermann

European Central Bank (ECB); University of Kiel; Deutsche Bundesbank

Siria Angino

European Central Bank (ECB)

Nils Hernborg

European Central Bank (ECB)

Henrique Basso

Banco de España

Matthias S. Hertweck

Deutsche Bundesbank

Gert Bijnens

KU Leuven

Elena Bobeica

European Central Bank (ECB)

Pascal Jacquinot

European Central Bank (ECB)

Katalin Bodnár

European Central Bank (ECB)

Andrew Kanutin

European Central Bank (ECB)

Alex Karsay

Národná banka Slovenska

Daniel Kienzler

University of St. Gallen

Agostino Consolo

ECB; European Central Bank; Bocconi University

Aleksandra Kolndrekaj

European Central Bank (ECB)

Marta De Philippis

Bank of Italy

Stéphane Lhuissier

Banque de France

Antonio Dias da Silva

European Central Bank (ECB)

Julien Le Roux

European Central Bank (ECB)

Marteen Dossche

European Central Bank (ECB) - Directorate General Economics

Matija Lozej

European Central Bank (ECB); Central Bank of Ireland; University of Primorska

Stéphane Dupraz

Banque de France

Juraj Falath

Národná banka Slovenska

Falk Mazelis

European Central Bank (ECB)

Francesco Mongelli

European Central Bank (ECB)

Sandra Gomes

Bank of Portugal

José Montero

Banco de España

Ramon Gomez Salvador

European Central Bank (ECB)

Roberto Motto

European Central Bank (ECB)

Anton Nakov

European Central Bank (ECB); CEPR

Adriana Grasso

Bank of Italy

Myroslav Pidkuyko

Banco de España; University of Manchester - Department of Economics

Markus Haavio

Bank of Finland - Research

Celine Piton

National Bank of Belgium

Gasper Ploj

University of Bonn

Jirka Slacalek

European Central Bank (ECB)

Maximilian Propst

European Central Bank (ECB)

Michel Soudan

European Central Bank (ECB)

Pedro Luis Rebelo

European Central Bank (ECB)

Béla Szörfi

European Central Bank (ECB)

Dominik Thaler

Banco de España

Manuel Rodrigues

Bank of Portugal

Juuso Vanhala

Bank of Finland

Arthur Saint-Guilhem

European Central Bank (ECB)

Anders Warne

European Central Bank (ECB)

Ana Seco Justo

European Central Bank (ECB)

Anastasia Zhutova

Université Paris I Panthéon-Sorbonne

Domingos Seward

Bank of Portugal

Date Written: September, 2021

Abstract

This report discusses the role of the European Union’s full employment objective in the conduct of the ECB’s monetary policy. It first reviews a range of indicators of full employment, highlights the heterogeneity of labour market outcomes within different groups in the population and across countries, and documents the flatness of the Phillips curve in the euro area. In this context, it is stressed that labour market structures and trend labour market outcomes are primarily determined by national economic policies. The report then recalls that, in many circumstances, inflation and employment move together and pursuing price stability is conducive to supporting employment. However, in response to economic shocks that give rise to a temporary trade-off between employment and inflation stabilisation, the ECB’s medium-term orientation in pursuing price stability is shown to provide flexibility to contribute to the achievement of the EU’s full employment objective. Regarding the conduct of monetary policy in a low interest rate environment, model-based simulations suggest that history-dependent policy approaches − which have been proposed to overcome lasting shortfalls of inflation due to the effective lower bound on nominal interest rates by a more persistent policy response to disinflationary shocks − can help to bring employment closer to full employment, even though their effectiveness depends on the strength of the postulated expectations channels. Finally, the importance of employment income and wealth inequality in the transmission of monetary policy strengthens the case for more persistent or forceful easing policies (in pursuit of price stability) when interest rates are constrained by their lower bound.

Keywords: Employment, inequality, monetary policy

JEL Classification: E52, E24

Suggested Citation

Brand, Claus and Coenen, Günter and Sondermann, David and Lydon, Reamonn and Ajevskis, Viktors and Hammermann, Felix and Hammermann, Felix and Hammermann, Felix and Angino, Siria and Hernborg, Nils and Basso, Henrique and Hertweck, Matthias S. and Bijnens, Gert and Bobeica, Elena and Jacquinot, Pascal and Bodnár, Katalin and Kanutin, Andrew and Karsay, Alex and Kienzler, Daniel and Consolo, Agostino and Consolo, Agostino and Kolndrekaj, Aleksandra and Philippis, Marta De and Lhuissier, Stéphane and Dias da Silva, Antonio and Le Roux, Julien and Dossche, Marteen and Lozej, Matija and Lozej, Matija and Dupraz, Stéphane and Falath, Juraj and Mazelis, Falk and Mongelli, Francesco and Gomes, Sandra and Montero, José and Salvador, Ramon Gomez and Motto, Roberto and Nakov, Anton A. and Grasso, Adriana and Pidkuyko, Myroslav and Haavio, Markus and Piton, Celine and Ploj, Gasper and Slacalek, Jirka and Propst, Maximilian and Soudan, Michel and Rebelo, Pedro Luis and Szörfi, Béla and Thaler, Dominik and Rodrigues, Manuel and Vanhala, Juuso and Saint-Guilhem, Arthur and Warne, Anders and Justo, Ana Seco and Zhutova, Anastasia and Seward, Domingos, Employment and the Conduct of Monetary Policy in the Euro Area (September, 2021). ECB Occasional Paper No. 2021/275, Available at SSRN: https://ssrn.com/abstract=3928297

Claus Brand (Contact Author)

European Central Bank (ECB) ( email )

Eurotower
Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+0049 69 13440 (Phone)
+0044 69 1344 6000 (Fax)

Günter Coenen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7887 (Phone)
+49 69 1344 6575 (Fax)

David Sondermann

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Reamonn Lydon

Central Bank of Ireland

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Viktors Ajevskis

Bank of Latvia ( email )

Riga, 1050

Felix Hammermann

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

University of Kiel ( email )

Olshausenstr. 40
D-24118 Kiel, Schleswig-Holstein 24118
Germany

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Siria Angino

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Nils Hernborg

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Henrique Basso

Banco de España

Alcala 50
Madrid 28014
Spain

Matthias S. Hertweck

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Gert Bijnens

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Elena Bobeica

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Pascal Jacquinot

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Katalin Bodnár

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andrew Kanutin

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alex Karsay

Národná banka Slovenska

Bratislava
Slovakia

Daniel Kienzler

University of St. Gallen ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

Agostino Consolo

ECB ( email )

Sonnemannstrasse 22
Frankfurt am Main, Hessen 60314
Germany

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, Hessen 60314
Germany

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Aleksandra Kolndrekaj

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marta De Philippis

Bank of Italy

Via Nazionale 91
Rome, 00184
Italy

Stéphane Lhuissier

Banque de France ( email )

Paris
France

Antonio Dias da Silva

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Julien Le Roux

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marteen Dossche

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Matija Lozej

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Central Bank of Ireland ( email )

Dame Street
Dublin, 2
Ireland

University of Primorska ( email )

Glagoljaska 8
Koper, SI-6000
Slovenia

Stéphane Dupraz

Banque de France ( email )

Paris
France

Juraj Falath

Národná banka Slovenska

Bratislava
Slovakia

Falk Mazelis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Francesco Mongelli

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Sandra Gomes

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

José Montero

Banco de España

Alcala 50
Madrid 28014
Spain

Ramon Gomez Salvador

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Roberto Motto

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany

Anton A. Nakov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

CEPR ( email )

London
United Kingdom

Adriana Grasso

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Myroslav Pidkuyko

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

University of Manchester - Department of Economics ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom
447538278604 (Phone)

Markus Haavio

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Celine Piton

National Bank of Belgium

Brussels, B-1000
Belgium

Gasper Ploj

University of Bonn

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Jirka Slacalek

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Maximilian Propst

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Michel Soudan

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Pedro Luis Rebelo

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Béla Szörfi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Dominik Thaler

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Manuel Rodrigues

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Juuso Vanhala

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Arthur Saint-Guilhem

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Anders Warne

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ana Seco Justo

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Anastasia Zhutova

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

Domingos Seward

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

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