The effects of conventional and unconventional monetary policy on the unemployment rate in the US

Abstract

Purpose

The purpose of this paper is to investigate the impact of the Federal Reserve's conventional and unconventional monetary policy shocks on the US unemployment rate.

Design/methodology/approach

The authors employ a unified time-varying framework to an extensive data set from 1960 to 2019.

Findings

The authors find that both conventional and unconventional monetary policy influence the unemployment rate, but the effects of unconventional monetary policy vary greatly during the first, second and third rounds of quantitative easing (dubbed QE1, QE2 and QE3, respectively). It significantly influenced the unemployment rate in QE3. However, the effects are less persistent than the effects of conventional monetary policy shocks. The impact of unconventional monetary policy transmits to the real economy through conventional interest rates, exchange rates and asset price channels. The responses of unemployment rate are smaller during QE1 and QE2 due to the rise in inflation uncertainty and economic policy uncertainty.

Originality/value

The impact of the Fed's unconventional monetary policy shocks on the US unemployment rate during QE1, QE2 and QE3 is time-varying. It is explained by inflation uncertainty and real option channels.

Citation

Dash, P. (2023), "The effects of conventional and unconventional monetary policy on the unemployment rate in the US", Journal of Economic Studies, Vol. 50 No. 7, pp. 1413-1427. https://doi.org/10.1108/JES-10-2022-0555