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Discussion Paper Details

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

Author(s): Christopher Erceg and Andrew Levin

Publication Date: September 2013

Keyword(s): labor force, policy tradeoffs, simple rules and unemployment rate

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Erceg, C and Levin, A. 2013. 'Labor Force Participation and Monetary Policy in the Wake of the Great Recession'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9668