Monetary Policy and the Labor Market: A Quasi-Experiment in Sweden

We analyze a monetary policy quasi-experiment in Sweden from 2010–2011, when the Riksbank raised the interest rate substantially as the economy recovered from the Great Recession. We argue that this tightening was a large, credible, and partially unexpected deviation from the historical policy rule. Using administrative micro data, we explore how this shock affected the labor market. We find that unemployment increased broadly, not just at interest-rate sensitive firms, but with large differences across workers within firms. Moreover, we find that labor market rigidities amplified the effects, as sectors with more rigid wage contracts saw larger increases in unemployment.