The Taylor principle and (in-)determinacy in a New Keynesian model with hiring frictions and skill loss
AbstractWe introduce skill decay during unemployment into Blanchard and Gali's (2008) 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" labour 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. Under indeterminacy, an adverse sunspot shock increases unemployment extremely persistently.
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Bibliographic InfoPaper provided by National Bank of Belgium in its series Working Paper Research with number 208.
Length: 75 pages
Date of creation: Nov 2010
Date of revision:
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Monetary policy rules; Taylor principle; Determinacy; Hysteresis; Skill decay;
Other versions of this item:
- Rannenberg, Ansgar, 2009. "The Taylor Principle and (In-) Determinacy in a New Keynesian Model with hiring Frictions and Skill Loss," SIRE Discussion Papers 2009-48, Scottish Institute for Research in Economics (SIRE).
- Ansgar Rannenberg, 2009. "The Taylor Principle and (In-) Determinacy in a New Keynesian Model with hiring Frictions and Skill Loss," CDMA Working Paper Series 200909, Centre for Dynamic Macroeconomic Analysis.
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-13 (All new papers)
- NEP-CBA-2010-11-13 (Central Banking)
- NEP-MAC-2010-11-13 (Macroeconomics)
- NEP-MON-2010-11-13 (Monetary Economics)
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