Monetary policy, the bank-lending channel and labor market adjustment of firms

This paper studies the real effects of monetary policy on firms' labor adjustment. Using detailed bank data together with administrative firm and worker data for Germany, we find that firms reduce employment in response to contractionary monetary policy.

We show that this employment reduction results from a relative decline in inflows rather than outflows. Inflows fall in particular for low-wage workers, whereas firms retain high-wage workers. Outflows for transitions to unemployment increase, while employment-to-employment outflows falls.

We interpret this as evidence for labor hoarding. Using variation in the bank exposure to monetary policy, we show that these results are driven by the exposure of the firm to the bank-lending channel.

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