Monetary Policy and the Labor Market: A Quasi-Experiment in Sweden
62 Pages Posted: 13 Sep 2023
Date Written: September 11, 2023
We analyze a monetary quasi-experiment in Sweden from 2010–2011, when the Riksbank raised the interest rate substantially. We argue that this increase was unrelated to labor market conditions, driven instead by new concerns at the Riksbank about financial stability. Using a battery of specifications that rule out domestic or international confounders, we show that this monetary tightening led to a substantial economic contraction, raising unemployment by 1–2 percentage points. Using administrative micro data, we find that nominal wage rigidity drove much of the unemployment response and that the monetary contraction was more regressive than the typical business cycle.
Keywords: Monetary Policy, Labor Markets, Quasi-Experiment
JEL Classification: E24, E52, E58
Suggested Citation: Suggested Citation