The Asymmetric Effects of Monetary Policy on Job Creation and Destruction

This paper presents theory and evidence on the asymmetric effect of monetary policy on job creation and destruction. Using the most recent developments in matching theory, the paper shows how job creation and job destruction respond to changes in interest rates. In a model in which existing firms face idiosyncratic uncertainty and endogenously select the separation rate, a tightening of monetary policy, as described by an exogenous increase in interest rates, is immediately transmitted into higher job destruction. Conversely, easing monetary policy produces a slow response in job creation and, in particular, does not results in a one time jump in job creation like the one time jump in job destruction brought about by higher interest rates. As a consequence, net employment change responds more to increases than to reductions. The paper implements a standard econometric technique for identifying the stance of monetary policy and shows that the empirical implications of the model are broadly supported by the data. Increases in the federal fund rates significantly affect job destruction, while reductions in interest rates fail to stimulate job creation. Using quarterly data for U.S. manufacturing, there appears to be a clear asymmetric effect of interest rate changes on the process of job creation and destruction.