Keeping monetary policy loose can help labor reallocation -paper By Reuters

WASHINGTON (Reuters) – Global central banks could do well to keep interest rates low for as long as possible in order to provide the optimal environment for people to move from industries that have been curtailed by the COVID-19 pandemic to those that have thrived, according to an academic paper presented to a premier economic policy conference on Friday.

“We have shown that a desire to facilitate the reallocation process can lead to favor a more expansionary monetary policy,” wrote lead author Veronica Guerrieri, a professor of economics at the University of Chicago, and her team of co-authors in the paper, which was presented to the Kansas City Federal Reserve’s annual symposium, held online for the second year running due to COVID-19.

A loose monetary policy environment promotes wage inflation in those sectors that are expanding, which in turn “can facilitate the adjustment of relative wages, so as to provide the right price signals to encourage mobility,” they wrote.

The authors did not directly reference the U.S. Federal Reserve in the paper, but a number of the central bank’s top policymakers were expected to be in the online audience

The pandemic has upended various industries in the United States, with businesses reporting worker shortages and the need to increase wages to attract applicants. Supply chain constraints during a period of high demand have also caused a spike in inflation, which is currently well above the central bank’s 2% average goal.

Despite a bump in overall wage growth in the second quarter to the fastest pace in 13 years on an annual basis, real wages have been negative for the last four months amid overall price pressures. Federal Reserve policymakers are keenly watching broad inflation measures, even as they strive to help the economy recoup jobs lost due to the health crisis, as they mull when to begin reducing their extraordinary support of the economy.

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