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Monetary Policy and Employment

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  • McGrattan, Ellen R.

    (Federal Reserve Bank of Minneapolis)

Abstract

In its “Statement on Longer-Run Goals and Monetary Policy Strategy,” the Federal Open Market Committee (Federal Reserve Board of Governors, 2014) summarizes its two main objectives: to mitigate (i) deviations of inflation from its longer-run goal and (ii) deviations of employment from the Federal Open Market Committee’s assessment of its maximum level. In the case of employment, the statement acknowledges that “the maximum level ... is largely determined by nonmonetary factors,” which is why the FOMC sets no fixed goal for the employment level. It instead depends on the Committee’s “assessment.” In this paper, I investigate the link between monetary policy and employment using predictions of current monetary theory. The results show that even with the extraordinary monetary accommodation provided by the Fed since 2008, theory predicts only a small impact of monetary policy on employment. Other research suggests that to understand what does impact employment levels and hours worked, economic theory should be modified to account for factors that impact labor-leisure decisions.

Suggested Citation

  • McGrattan, Ellen R., 2015. "Monetary Policy and Employment," Economic Policy Paper 15-7, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmep:15-7
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    File URL: https://www.minneapolisfed.org/~/media/files/pubs/eppapers/15-7/epp-15-7-monetary-policy-employment.pdf
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    References listed on IDEAS

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    1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
    2. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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