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e61 Seminar Series | Some Like it Hot: Inclusive Monetary Policy Under Okun’s Hypothesis
31 January @ 12:00 pm - 1:00 pm AEDT
Presenter: Gianluca Violante
Authors: Gianluca Violante Princeton University and Felipe Alves, Bank of Canada
Time & Location
31 Jan, 12:00 pm – 1:00 pm
Macquarie Uni City Campus, Level 24/123 Pitt St, Sydney NSW 2000, Australia | Online
About the event
Okun (1973) argued that a ‘high-pressure economy’, albeit more inflationary, would persistently improve labor market outcomes of the most disadvantaged groups. To assess Okun’s hypothesis, we develop a heterogeneous-agent incomplete-market framework with a three-state frictional model of the labor market where employment and earnings trajectories of low-skilled workers are more exposed to the business cycle, in line with U.S. data. Relative to a standard inflation targeting rule, a monetary policy rule that is more accommodating during booms and more aggressive during recessions has long-lasting effects at the bottom of the distribution: for workers at the lowest quartile, participation increases by 2 ppts and real earnings by 5%. The flip side of this more ‘inclusive’ monetary policy is 1.5 ppts of additional inflation.