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

Author/Editor: Christopher J. Erceg | Andrew Levin
Authorized for Distribution: December 16, 2013
Electronic Access: Free Full Text (PDF file size is 909KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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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Series: Working Paper No. 13/245
Subject(s): Economic recession | United States | Labor markets | Unemployment | Monetary policy
    Published:   December 16, 2013        
    ISBN/ISSN:   9781484301456/1018-5941   Format:   Paper
    Stock No:   WPIEA2013245   Pages:   60
    Price:   US$18.00
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