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Monetary Shocks in a Model with Skill Loss

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  • JULEN ESTEBAN-PRETEL
  • ELISA FARAGLIA

Abstract

Unemployment shows persistent and long-lasting responses to nominal and real shocks. Standard real business cycle models with search frictions but a homogeneous labor force are able to generate some volatility and 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 large and well known. One of the possible causes/consequences of long-term unemployment is the skill deterioration of the unemployment pool. In this paper, we introduce the skill loss mechanism, and therefore a heterogeneous labor force, in a New Keynesian framework with search frictions. Calibrating the model for the Spanish economy, we show that while the skill loss mechanism helps to explain the magnitude of the response of unemployment to monetary shocks, it does not improve the performance of the homogeneous worker model in terms of the persistence of the response, especially for short- and long-term unemployment. Copyright (c) 2010 The Ohio State University.

Suggested Citation

  • Julen Esteban-Pretel & Elisa Faraglia, 2010. "Monetary Shocks in a Model with Skill Loss," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1235-1265, October.
  • Handle: RePEc:mcb:jmoncb:v:42:y:2010:i:7:p:1235-1265
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    Cited by:

    1. Laureys, Lien, 2014. "The cost of human capital depreciation during unemployment," Bank of England working papers 505, Bank of England.
    2. Khalifa, Sherif, 2015. "Learning-by-doing and unemployment dynamics," Economic Modelling, Elsevier, vol. 44(C), pages 180-187.
    3. Vincent Sterk, 2016. "The Dark Corners of the Labor Market," Discussion Papers 1603, Centre for Macroeconomics (CFM).
    4. Kienzler, Daniel, 2012. "Long-term Unemployment over the Business Cycle, Skill Loss, and Monetary Policy," Working Papers on Finance 1205, University of St. Gallen, School of Finance.
    5. Vincent Sterk, 2015. "The Dark Corners of the Labor Market," 2015 Meeting Papers 798, Society for Economic Dynamics.

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