Discussion Paper Details

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Title: The Missing Link: Monetary Policy and The Labor Share

Author(s): Cristiano Cantore, Filippo Ferroni and Miguel León-Ledesma

Publication Date: February 2019

Keyword(s): Labor Share and monetary policy shocks

Programme Area(s): Monetary Economics and Fluctuations

Abstract: The textbook New-Keynesian (NK) model implies that the labor share is pro-cyclical conditional on a monetary policy shock. We present evidence that a monetary policy tightening robustly increased the labor share and decreased real wages and labor productivity during the Great Moderation period in the US, the Euro Area, the UK, Australia, and Canada. We show that this is inconsistent not only with the basic NK model, but with a wide variety of NK models commonly used for monetary policy analysis and where the direct link between the labor share and the markup can be broken.

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Bibliographic Reference

Cantore, C, Ferroni, F and León-Ledesma, M. 2019. 'The Missing Link: Monetary Policy and The Labor Share'. London, Centre for Economic Policy Research.