The Missing Link: Monetary Policy and The Labor Share

Cristiano Cantore, Filippo Ferroni and Miguel León-Ledesma.

How do monetary policy shocks affect the distribution of income between workers and owners of capital? Do workers benefit relatively more when policy changes? Tackling this question empirically requires technical econometric methods, but we are able to show that the share of output allocated to wages (the labor share) temporarily increases following a positive shock to the interest rate. This means that the slice of the pie enjoyed by those whose earnings are mostly made up of wages increases at the expense of profits and capital income. Strikingly, this redistribution channel that shows up in the data runs precisely in the opposite direction to the predictions of standard New Keynesian models commonly used to study the effects of monetary policy.

Continue reading “The Missing Link: Monetary Policy and The Labor Share”

An estimate of the UK’s natural rate of interest

Mike Goldby, Lien Laureys and Kate Reinold.

The natural rate of interest is usually defined as the one prevailing when economic activity is at potential and inflation is low and stable. As this has a very similar flavour to the monetary policy objective of many central banks, it is interesting to policymakers. The natural rate is unobservable and needs to be estimated. In this post, we show an estimate derived from a standard macroeconomic model which suggests that the (real) natural rate fell very sharply during the financial crisis, perhaps to as low as -6%, and that, despite a marked recovery since 2012, it remains around zero. Continue reading “An estimate of the UK’s natural rate of interest”