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Monetary Shocks in a Model with Loss of Skills

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  • Julen Esteban-Pretel

    (Faculty of Economics, University of Tokyo)

  • Elisa Faraglia

    (London Business School)

Abstract

Unemployment shows persistent and long lasting responses to nominal and real shocks. Standard real business cycle models with search frictions but homogeneous labor force are able to generate some persistence, but not enough to match the empirical evidence. Moreover, empirical studies emphasize the importance of the heterogeneity of the unemployment pool to fully understand unemployment dynamics. In particular, in most European countries the incidence of long term unemployment is big and well known. One of the causes/consequences of long-term unemployment is the skill deterioration of the unemployment pool. In this paper we introduce the loss of skill mechanism, and therefore an heterogeneous labor force, in a New Keynesian framework with search frictions. Calibrating the model to the Spanish economy, we show that the loss of skill mechanism helps to explain the persistence in the response of unemployment to monetary shocks.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-380.

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Length: 34 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:tky:fseres:2005cf380

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  1. Larsen, Birthe, 2001. "Minimum wages, technological progress and loss of skill," European Economic Review, Elsevier, vol. 45(8), pages 1521-1544, August.
  2. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  3. Den Haan, Wouter & Haefke, Christian & Ramey, Gary, 2001. "Shocks and Institutions in a Job Matching Model," CEPR Discussion Papers 2970, C.E.P.R. Discussion Papers.
  4. Stephen R. G. Jones & W. Craig Riddell, 1999. "The Measurement of Unemployment: An Empirical Approach," Econometrica, Econometric Society, vol. 67(1), pages 147-162, January.
  5. Lancaster, Tony, 1979. "Econometric Methods for the Duration of Unemployment," Econometrica, Econometric Society, vol. 47(4), pages 939-56, July.
  6. Pissarides, Christopher A, 1992. "Loss of Skill during Unemployment and the Persistence of Employment Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1371-91, November.
  7. Coles, Melvyn & Masters, Adrian, 2000. "Retraining and long-term unemployment in a model of unlearning by not doing," European Economic Review, Elsevier, vol. 44(9), pages 1801-1822, October.
  8. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  9. Acemoglu, Daron, 1995. "Public Policy in a Model of Long-Term Unemployment," Economica, London School of Economics and Political Science, vol. 62(246), pages 161-78, May.
  10. Wouter J. den Haan & Garey Ramey & Joel Watson, 1997. "Job Destruction and Propagation of Shocks," NBER Working Papers 6275, National Bureau of Economic Research, Inc.
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Cited by:
  1. Carl E. Walsh & Federico Ravenna, 2010. "Business Cycles and Labor Market Flows with Sequential Screening," 2010 Meeting Papers 571, Society for Economic Dynamics.

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