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Structural factors, unemployment and monetary policy: the useful role of the natural rate of interest

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Abstract

We study the role of monetary policy in response to variations in unemployment due to structural factors, modeled as exogenous changes in matching efficiency and in the size of the labor force. We fi?nd that monetary policy should play a role in such a scenario. Both negative shocks to the matching efficiency and negative shocks to the labor force increase infl?ation, thus calling for an increase in the interest rate when policy is conducted following Taylor-type rules. However, the natural rate of interest declines in response to both shocks. The optimal Ramsey policy prescribes small deviations from price stability and lowers the interest rate, thus tracking the natural rate of interest in response to both shocks. Structural factors in the labor market may have contributed to the recent decline in the natural rate of interest in the US.

Suggested Citation

  • Francesco Furlanetto & Paolo Gelain, 2016. "Structural factors, unemployment and monetary policy: the useful role of the natural rate of interest," Working Paper 2016/17, Norges Bank.
    • Handle: RePEc:bno:worpap:2016_17
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    File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2016/172016/
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    Keywords

    Optimal Monetary Policy; Taylor Rules; Natural Rate of Interest; Natural Rate of Unemployment; Labor Force Shocks;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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