The Taylor Principle and (In-) Determinacy in a New Keynesian Model with hiring Frictions and Skill Loss
AbstractWe introduce duration dependent skill decay among the unemployed into a New-Keynesian model with hiring frictions developed by Blanchard/Gali (2008). If the central bank responds only to (current, lagged or expected future) inflation and quarÂ¬terly skill decay is above a threshold level, determinacy requires a coefficient on inflaÂ¬tion smaller than one. The threshold level is plausible with little steady-state hiring and firing ("Continental European Calibration") but implausibly high in the oppoÂ¬site case ("American calibration"). Neither interest rate smoothing nor responding to the output gap helps to restore determinacy if skill decay exceeds the threshold level. However, a modest response to unemployment guarantees determinacy. Moreover, under indeterminacy, both an adverse sunspot shock and an adverse technology shock increase unemployment extremely persistently.
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Bibliographic InfoPaper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200909.
Date of creation: 15 Sep 2009
Date of revision:
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monetary policy rules; Taylor principle; NAIRU; unemployment; hysteresis.;
Other versions of this item:
- Ansgar Rannenberg, 2010. "The Taylor principle and (in-)determinacy in a New Keynesian model with hiring frictions and skill loss," Working Paper Research 208, National Bank of Belgium.
- 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).
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- 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-2009-11-07 (All new papers)
- NEP-CBA-2009-11-07 (Central Banking)
- NEP-MAC-2009-11-07 (Macroeconomics)
- NEP-MON-2009-11-07 (Monetary Economics)
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