Has the U.S. Economy Become Less Interest Rate Sensitive?

This article investigates shifts in the economy's interest sensitivity by examining how total employment responds to changes in monetary policy. The Federal Open Market Committee (FOMC) has emphasized the important link between monetary policy and employment. For example, in September 2012, the...

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Bibliographic Details
Published in:Economic review (Kansas City) 2015-04 (second quarter), p.5-5
Main Authors: Willis, Jonathan L, Cao, Guangye
Format: Article
Language:English
Subjects:
Employment
Industry
Interest rates
Labor
Markets
Monetary policy
Online Access:Get full text
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Summary:This article investigates shifts in the economy's interest sensitivity by examining how total employment responds to changes in monetary policy. The Federal Open Market Committee (FOMC) has emphasized the important link between monetary policy and employment. For example, in September 2012, the FOMC announced its intention to provide additional monetary policy accommodation on an open-ended basis that would continue as long as 'the outlook for the labor market does not improve substantially.' While this implies a direct transmission channel between monetary policy and employment, the empirical analysis in this article suggests aggregate employment has become less responsive to monetary policy in recent decades. This article finds that the key contributors to declining interest sensitivity are structural shifts within industries and a weaker transmission mechanism between short-term interest rates and the economy. Overall, the findings suggest the decline in the economy's interest sensitivity is not due to changes in the conduct of monetary policy but rather to structural changes in industries and financial markets. Adapted from the source document.
ISSN:0161-2387