Abstract
ABSTRACT We conduct a counterfactual exercise to determine the potential effectiveness of conventional monetary policy to limit the economic damage caused by labour market uncertainties related to a pandemic. We model the labour market uncertainty as a second-order shock to a time-varying job separation rate. We show that the economic effects of heightened uncertainty in the job separation rate depend crucially on the Taylor-rule type adopted by the monetary authority. We explore the quantitative implications of pandemic-induced job separation uncertainty shocks under alternative interest rate rules and find that recessions following job separation uncertainty shocks are more severe under rules with no interest rate smoothing and strong inflation targeting.
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