Monetary Policy and the Labor Market: A Quasi-Experiment in Sweden


We analyze a quasi-experiment of monetary policy and the labor market in Sweden during 2010–2011, where the central bank raised the interest rate substantially while the economy was still recovering from the Great Recession. We argue that this tightening was a large, credible, and unexpected deviation from the central bank’s historical policy rule. Using this shock and administrative unemployment and earnings records, we quantify the overall effect on the labor market, examine which workers and firms are most affected, and explore what these patterns imply for how monetary policy affects the labor market. We show that this shock increased unemployment broadly, but the increase in unemployment varied somewhat across different types of workers, with low-tenure workers in particular being highly affected, and less across different types of firms. Moreover, we find that the structure of the labor market amplified the effects of monetary policy, as workers in sectors with more rigid wage contracts saw larger increases in unemployment. These patterns support models in which monetary policy leads to general equilibrium changes in labor income, mediated through the institutions of the labor market.

John Coglianese
Senior Economist

My research focuses on the macroeconomics of labor markets.