Monetary Policy and Employment

Ellen McGrattan

No 15-7, Economic Policy Paper from 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.

Pages: 6 pages
Date: 2015-09-23
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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