Front Matter Page
European II Department
Authorized for distribution by Julian Berengaut
Contents
Summary
I. Introduction
II. The Existing Empirical Evidence
III. Concept and Notations
IV. A Minimalist Model: Steady State
V. The Model with Tight and Easy Policy
VI. Empirical Evidence
A. The Data
B. Evidence of Asymmetry
C. Robustness Checks
VII. Conclusions
Tables
1. Baseline Parameter Values
2. Federal Fund Rate Process, 1971-1988
3. Job Flows Estimate, 1972-88
4. Job Flows Estimate, 1972-88 (Continuing Firms)
5. Job Flows Estimate, 1972-88 (Joint Estimates)
6. Job Flows Estimate, 1972-88 (Joint Estimates)
7. Job Flows Estimate, 1972-88 (Two Lags of Federal Rate)
8. Job Flows Estimate, 1972-88 (Oil Price Included)
Figures
1. Net Employment Change in Response to Changes in Policy
2. Gross Job Flows in Response to Changes in Policy
3. Net and Gross Job Flows in Manufacturing, 1972-88
Appendix I. Some Comparative Static Results
Appendix II. The Distribution of Employment
References
SUMMARY
This paper presents theory and evidence on the asymmetric effect of monetary policy on job creation and destruction. Using the most recent developments in matching theory, the paper shows how job creation and job destruction respond to changes in interest rates. In a model in which existing firms face idiosyncratic uncertainty and endogenously select the separation rate, a tightening of monetary policy, as described by an exogenous increase in interest rates, is immediately transmitted into higher job destruction. Conversely, easing monetary policy produces a slow response in job creation and, in particular, does not results in a one time jump in job creation like the one time jump in job destruction brought about by higher interest rates. As a consequence, net employment change responds more to increases than to reductions.
The paper implements a standard econometric technique for identifying the stance of monetary policy and shows that the empirical implications of the model are broadly supported by the data. Increases in the federal fund rates significantly affect job destruction, while reductions in interest rates fail to stimulate job creation. Using quarterly data for U.S. manufacturing, there appears to be a clear asymmetric effect of interest rate changes on the process of job creation and destruction.