Modelling monetary policy’s impact on labour markets under Covid-19

This paper investigates the effectiveness of monetary policy on macroeconomic and labour market variables in the US, taking into account the impact of the Covid-19 pandemic. Using a medium scale Bayesian VAR that explicitly incorporates the exceptionally large shocks during the pandemic, we find tha...

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Bibliographic Details
Published in:Economics letters 2023-09, Vol.230, p.111241, Article 111241
Main Authors: Evgenidis, Anastasios, Fasianos, Apostolos
Format: Article
Language:English
Subjects:
Covid-19
Extreme events
Inequality
Monetary policy
VAR
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Summary:This paper investigates the effectiveness of monetary policy on macroeconomic and labour market variables in the US, taking into account the impact of the Covid-19 pandemic. Using a medium scale Bayesian VAR that explicitly incorporates the exceptionally large shocks during the pandemic, we find that expansionary monetary policy has more pronounced and durable effects on labour market variables, in comparison to a non-pandemic setup for the same sample. Additionally, our analysis suggests that a non-pandemic setup, would result in rises in income inequality. In contrast, our proposed setup predicts a significant reduction in income inequality due to an increase in the income share of the bottom 50%. •The paper revisits the labour market effects of a monetary policy shock, considering the pandemic period.•Use a newly proposed method that downplays the pandemic observations.•Monetary policy shocks increase GDP, employment, and reduce unemployment and income inequality.•Neglecting the pandemic’s exceptional effects mistakenly implies minimal impact on the labor market
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2023.111241