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The Taylor Principle And (In-) Determinacy With Hiring Frictions And Skill Loss

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  • Rannenberg, Ansgar

Abstract

We introduce skill decay during unemployment into a New Keynesian model with hiring frictions and real-wage rigidity. Plausible values of quarterly skill decay and real-wage rigidity turn the long-run marginal cost–unemployment relationship positive in a “European” labor market with little hiring but not in a fluid “American” one. If the marginal cost–unemployment relationship is positive, determinacy requires a passive response to inflation in the central bank's interest feedback rule if the rule features only inflation. Targeting steady-state output or unemployment helps to restore determinacy.

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  • Rannenberg, Ansgar, 2015. "The Taylor Principle And (In-) Determinacy With Hiring Frictions And Skill Loss," Macroeconomic Dynamics, Cambridge University Press, vol. 19(5), pages 1045-1073, July.
    • Handle: RePEc:cup:macdyn:v:19:y:2015:i:05:p:1045-1073_00
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    Cited by:

    1. McKnight, Stephen, 2017. "Are Consumption Taxes Preferable To Income Taxes For Preventing Macroeconomic Instability?," Macroeconomic Dynamics, Cambridge University Press, vol. 21(4), pages 1023-1058, June.
    2. Zhao, Junzhu, 2023. "Wealth in utility, the Taylor principle and determinacy," Journal of Macroeconomics, Elsevier, vol. 76(C).

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