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

Abstract

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%.