Monetary Policy and Labor Market Transitions

We use a vector autoregressive model to examine the relationship between monetary policy and labor market transitions. We use these impulse response functions in a Markov chain to examine the link between monetary policy and the unemployment rate. We find that an increase in the federal funds rate increases the probability of moving from an employed to an unemployed status, and causes the probability of moving from an unemployed to an employed status to decrease. The probability of transitioning from unemployed to not-in-the-labor-force decreases, but the same shock increases the probability of moving from not-in-the-labor force to unemployed.