a column by Cristiano Cantore, Filippo Ferroni and Miguel León-Ledesma for VOX: CEPR’s Policy Portal
Despite its importance, there is no systematic empirical evidence on the effect of monetary policy shocks on the share of output allocated to wages.
Using data for five developed economies, this column finds that standard models generate the ‘wrong sign’ for the effect when compared to the empirical results, and that the labour share temporarily increases following a positive shock to the interest rate. Using the standard models to analyse the distributional effects of monetary shocks could be misleading.
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