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The effectiveness of labor market indicators for conducting monetary policy: Evidence from the Korean economy

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  • Lee, Hangyu
  • Kim, Tae Bong

Abstract

The effectiveness of labor market indicators for monetary policy has not yet been theoretically established despite their practical significance to practitioners. To bridge the gap between theory and practice, this paper investigates whether labor market indicators may improve the efficiency of monetary policy implementation by providing the monetary authority with timely information about current economic conditions. To this end, a small open macroeconomic model with endogenous involuntary unemployment is constructed, estimated, and simulated based on the Korean economy. We find that a monetary policy rule augmented by labor market indicators outperforms one using a conventional output gap in terms of social welfare.

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  • Lee, Hangyu & Kim, Tae Bong, 2023. "The effectiveness of labor market indicators for conducting monetary policy: Evidence from the Korean economy," Economic Modelling, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:ecmode:v:118:y:2023:i:c:s0264999322003352
    DOI: 10.1016/j.econmod.2022.106098
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    More about this item

    Keywords

    Labor market indicators; Unemployment; Monetary policy; Welfare analysis; Korean economy; New Keynesian dynamic general equilibrium (DSGE) model;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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