Monetary policy has a large impact on employment

Alexandre Assemien, Loesse J. Esso, and Kouamé D. Kanga, “Can Monetary Policy Influence Employment? The case of West African States,” Revue d'économie politique (Vol. 129), 2019, pages 777-813, https://www.cairn.info/revue-d-economie-politique-2019-5-page-777.htm?ref=doi

The paper shows that the monetary policy of the central bank affects inflation, output, and employment. The job finding probability depends on the dynamics of the current and future level of employment. Monetary policy promotes employment, increases production, consumption, inflation and investment. Moreover, the real wage and the instantaneous probability of vacancy being filled decrease after the positive monetary shock. Finally, the labour market variables display heterogeneous responses by using different settings while this is not the case for macroeconomic variables. We find a lower reaction of the unemployment rate when the job separation or the bargaining power of firms is high. These results imply that the transmission of monetary policy depends on the labour market characteristics. The reaction of (un)employment, job find probability and the state of the vacant jobs has stronger impact on a more frictional labour market and when we increase (decrease) the bargaining power of workers (firms).

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To ascertain these theoretical findings, we estimate two structural panel VAR models. The estimates suggest that an expansionary monetary policy affects employment in the WAEMU. The second VAR model shows evidence of heterogeneous responses to the common monetary policy shock. Overall, the responses of the variables in the VAR models are qualitatively consistent with those of the DSGE model.