Monetary Policy and Swedish Unemployment Fluctuations

Abstract

A widely spread belief among economists is that monetary policy has relatively short-lived effects on real variables such as unemployment. Previous studies indicate that monetary policy affects the output gap only at business cycle frequencies, but the effects on unemployment may well be more persistent in countries with highly regulated labor markets. We study the Swedish experience of unemployment and monetary policy. Using a structural VAR we find that around 30 percent of the fluctuations in unemployment are caused by shocks to monetary policy. The effects are also quite persistent. In the preferred model, almost 30 percent of the maximum effect of a shock still remains after ten years.

Inflation Targeting Monetary Policy and Unemployment in South Africa

“…Analyzing the relationship between monetary policy and unemployment in Sweden, Alexius and Holmlund used a structural vector autoregressive (SVAR) methodology. Alexius and Holmlund (2007) use quarterly data spanning 1980 to 2005 on the output gap, unemployment, monetary conditions index, foreign output gap, technology and government deficit. The study finds out and concludes that expansionary monetary policy increases the output gap and as a result reduce the level of unemployment in a country.…”