Monetary Policy and Labor Supply

This paper analyzes the impact of an increasing labor supply on the effectivity of monetary policy. The integration of countries like China, India and from Eastern Europe, in particular Russia, have increased the global labor supply. This increase has put downward pressure on wages and finally prices. Consequently central banks have been able to keep interest rates low [[ FO: now, focus on interest rate, not on money ]] while inflation remained moderate. The relatively low interest rates have boosted the asset markets and finally stimulated consumption and investment. Given this, we suppose, that the recent period of high growth ("the Great Moderation", "the Roaring Nineties") has not been caused by the wisdom of the central banks but by the increase in global labor supply.

Kiel Institute Expert