Labor market reforms and the monetary policy environment

Abstract

Abstract Do labor market reforms initiated in periods of loose monetary policy yield different outcomes from those that were introduced in periods when monetary tightening prevailed? The answer to this question is a firm, yes. We document the vital role of accommodative monetary policy for an increase in unemployment benefits, spending on active labor market policies, and labor market deregulation to boost growth and reduce unemployment. It was found that if interest rates cannot be reduced, then unemployment benefits should be lowered. A more rigid labor market, it was further found, can deliver expansionary effects, especially during the crisis period.