A tail of labor supply and a tale of monetary policy
Cristiano Cantore,
Filippo Ferroni,
Haroon Mumtaz and
Angeliki Theophilopoulou
No 2308, Discussion Papers from Centre for Macroeconomics (CFM)
Abstract:
We study the interaction between monetary policy and labor supply decisions at the household level. We uncover evidence of heterogeneous responses and a strong countercyclicality of hours worked in the left tail of the income distribution, following a monetary policy shock in the U.S. and the U.K. That is, while aggregate hours and labor earnings decline, employed individuals at the bottom of the income distribution increase their hours worked in response to an interest rate hike. Moreover, their response is stronger in magnitude relative to other income groups. We rationalize this using a two-agent New-Keynesian (TANK) model where our empirical findings can be replicated with heterogeneity in the marginal utility of consumption and a stronger income effect for the Hand-to-Mouth households. This setup uncovers a novel channel of transmission of monetary policy via inequality generated by the Hand-to-Mouth substitution of leisure for consumption following a negative income shock. Using a quantitative model with both intensive and extensive margin of labor supply that replicates our evidence, we show that this new channel reduces the amplification of monetary policy via inequality generated by the heterogenous behavior of unemployment along the income distribution.
Keywords: Monetary policy; Household Survey; FAVARs; TANK; Hand to Mouth (search for similar items in EconPapers)
JEL-codes: C10 E32 E52 (search for similar items in EconPapers)
Pages: 103 pages
Date: 2023-03
New Economics Papers: this item is included in nep-dge, nep-mon and nep-upt
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Citations: View citations in EconPapers (1)
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Related works:
Working Paper: A tail of labour supply and a tale of monetary policy (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:2308
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