The effect on employment growth
Bergman et al. in this paper investigate how expansionary monetary policy promotes employment growth for each group across local labor markets with different tightness. Their empirical investigations shows that:
- For demographic groups with lower average labor market attachment—Blacks, the least educated, and women—expansionary monetary policy has a larger effect on employment growth in tighter labor markets. For example, they find that a one standard deviation drop in the federal funds rate increases subsequent two-year Black employment growth by 0.91 percentage points more in tight labor markets (90th percentile) than in slack labor markets (10th percentile).
- The effects on less-attached workers are also persistent: monetary policy’s incremental effect on less-attached workers’ employment growth in tight labor markets peaks 7 to 9 quarters after interest rates decreases.
They then use a New Keynesian model with heterogeneous workers to analyze how monetary policy affects different parts of the labor market. In the model, worker types are differentiated by their productivity level.
We show that average inflation targeting results in larger declines in the hiring threshold and larger increases in employment. Lower productivity workers especially benefit from the average inflation targeting policy, with larger increase in employment as compared to higher productivity workers.
Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth
Authors: Nittai K. Bergman, David Matsa, Michael Weber
From: Tel Aviv University, Northwestern University, University of Chicago
The effect on central bank’s credibility
Average inflation targeting (AIT), argue Jia and Wu, is time inconsistency and its communication ambiguous. In this paper, the first to study AIT that deviates from the full-information rational expectations framework, they investigate the implications of these two issues. They use a three-equation New Keynesian model and modify the central bank’s objective function by introducing AIT to replace current inflation. The central bank minimizes its loss subject to a forward-looking Phillips curve. Although the central bank is discretionary and solves its problem period by period, equilibrium is path dependent: inflation oscillates around its steady state after a cost-push shock. They argue that:
- The optimal strategy for the central bank is to announce different horizons for AIT at different points in time, and ambiguous communication offers an implementable alternative to such self conflicting announcements.
- The time-inconsistent strategy is welfare improving, assuming the central bank can convince the private sector of its intention to implement AIT. They assess this assumption using social learning.
We show that ambiguous communication helps the central bank gain credibility and improve welfare in the long run despite AIT being time inconsistent. These results do not rely on whether the central bank has credibility initially, how agents weigh nowcast errors between inflation and the output gap, or if agents observe economic shocks with uncertainty.
Average Inflation Targeting: Time Inconsistency and Intentional Ambiguity
Authors: Chengcheng Jia, Jing Cynthia Wu
From: Federal Reserve Bank of Cleveland, University of Notre Dame
