Has the U.S. economy become less interest rate sensitive

Abstract

Over the past three decades, the U.S. economy seems to have become less responsive to monetary policy. Slow recoveries followed recessions in 1990-91, 2001, and 2007-09, a con-trast to the much more rapid recoveries that followed pre-1990 reces-sions. These slow recoveries occurred despite sizeable monetary accom-modation from the Federal Reserve, primarily through reductions in short-term interest rates. This article investigates shifts in the economy’s interest sensitivity by examining how total employment responds to changes in monetary policy. The Federal Open Market Committee (FOMC) has emphasized the important link between monetary policy and employment. For ex-ample, in September 2012, the FOMC announced its intention to provide additional monetary policy accommodation on an open-ended basis that would continue as long as “the outlook for the labor market does not improve substantially. ” While this implies a direct transmis-sion channel between monetary policy and employment, the empirical analysis in this article suggests aggregate employment has become less

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