Labor Force Participation and Monetary Policy in the Wake of the Great Recession

Andrew Levin () and Christopher Erceg

No 9668, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper, we provide compelling evidence that cyclical factors account for the bulk of the post-2007 decline in the U.S. labor force participation rate. We then proceed to formulate a stylized New Keynesian model in which labor force participation is essentially acyclical during "normal times" (that is, in response to small or transitory shocks) but drops markedly in the wake of a large and persistent aggregate demand shock. Finally, we show that these considerations can have potentially crucial implications for the design of monetary policy, especially under circumstances in which adjustments to the short-term interest rate are constrained by the zero lower bound.

Keywords: Labor force; Policy tradeoffs; Simple rules; Unemployment rate (search for similar items in EconPapers)
JEL-codes: E24 E32 E52 J21 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (47)

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Working Paper: Labor Force Participation and Monetary Policy in the Wake of the Great Recession (2013)
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