Monetary Policy and Labor Markets in a Developing Economy
We study the distributional effects of monetary policy in a developing economy with extensive employment informality. In particular, we examine how monetary policy impacts labor income growth and employment transitions using micro-level panel data. Adopting high-frequency identification, we construct a series of monetary policy surprises for Brazil that serves as an external instrument in a proxy-SVAR, thus allowing us to recover monetary policy shocks. Following a monetary contraction, both formal and informal workers experience declines in real income, with effects that are similarly pronounced across the low and middle-income quartiles, while higher earners suffer less. A monetary contraction also reduces the likelihood of large income gains, shifting the income growth distribution leftward. Moreover, a shock that raises the interest rate increases informality and unemployment persistence by making transitions to formal employment less frequent.
Abstract
We study the distributional effects of monetary policy in a developing economy with extensive employment informality. In particular, we examine how monetary policy impacts labor income growth and employment transitions using micro-level panel data. Adopting high-frequency identification, we construct a series of monetary policy surprises for Brazil that serves as an external instrument in a proxy-SVAR, thus allowing us to recover monetary policy shocks. Following a monetary contraction, both formal and informal workers experience declines in real income, with effects that are similarly pronounced across the low and middle-income quartiles, while higher earners suffer less. A monetary contraction also reduces the likelihood of large income gains, shifting the income growth distribution leftward. Moreover, a shock that raises the interest rate increases informality and unemployment persistence by making transitions to formal employment less frequent.
Status
Revised and Resubmitted, Journal of Money, Credit, and Banking