The missing link: monetary policy and the labor share

Paper accepted for publication in the Journal of the European Economic Association, co-authored by the School’s Professor Miguel Leon Ledesma.

Professor Miguel León-Ledesma along with co-authors Cristiano Cantore and Filippo Ferroni‘s have had the paper ‘The missing link: monetary policy and the labor share’ accepted for publication in the Journal of the European Economic Association.

“I think this is an important paper since it challenges the conventional wisdom for the transmission channel of monetary policy to real economic activity.” León-Ledesma told us.

“How do monetary policy shocks affect the distribution of income between workers and owners of capital? Do workers benefit relatively more when policy changes? Tackling this question empirically requires technical econometric methods, but we are able to show that the share of output allocated to wages (the labor share) temporarily increases following a positive shock to the interest rate.”

“Our results imply that either New Keynesian models (NK) are unable to separate the dynamics of the labor share from the markup, or that markups do not respond in the way NK models predict.”

Read the paper in its entirety here, a 2019 blog about the paper in Bank Underground and another on the VOX CEPR Policy Portal.