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Endogenous Growth, Skill Obsolescence, and Optimal Monetary Policy

Author

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  • Wolfgang Lechthaler

    (Oesterreichische Nationalbank, Austria and Kiel, Institute for the World Economy, Germany)

  • Mewael F. Tesfaselassie

    (University of Maryland Global Campus (Europe), Germany and University of Antwerp, Belgium)

Abstract

We analyze Ramsey optimal monetary policy in a New Keynesian model with skill loss from long-term unemployment and endogenous growth through learning-by-doing. The competitive equilibrium is shown to be inefficient, despite imposing the Hosios condition, due to firms failing to internalize the effects of current hiring on (i) future labor productivity through learning-by-doing; and (ii) future training costs of other firms. These externalities are complementary to each other, thereby justifying marked deviations from price stability. In a calibrated version of the full model, we show significant deviations of the optimal policy from constant inflation, and from Taylor-type rules, in response to productivity shocks.

Suggested Citation

  • Wolfgang Lechthaler & Mewael F. Tesfaselassie, 2025. "Endogenous Growth, Skill Obsolescence, and Optimal Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 21(2), pages 269-307, April.
    • Handle: RePEc:ijc:ijcjou:y:2025:q:2:a:6
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    References listed on IDEAS

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    1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    2. Dave Reifschneider & William Wascher & David Wilcox, 2015. "Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(1), pages 71-109, May.
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