Optimal Monetary Policy in the Presence of Human Capital Depreciation during Unemployment
When workers are exposed to human capital depreciation during periods of unemployment, hiring affects the unemployment pool’s composition in terms of skills, and hence the economy’s production potential. Introducing human capital depreciation during unemployment into an otherwise standard New Keynesian model with search frictions in the labour market leads to the finding that the flexibleprice allocation is no longer constrained-efficient even when the standard Hosios (1990) condition holds. This is because it generates a composition externality in job creation: firms ignore how their hiring decisions affect the extent to which the unemployed workers’ skills erode, and hence the output that can be produced by new matches. Consequently, it might be desirable from a social point of view for monetary policy to deviate from strict inflation targeting. Although optimal price inflation is no longer zero, strict inflation targeting is shown to stay close to the optimal policy.
|Date of creation:||Jun 2014|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.centreformacroeconomics.ac.uk/|
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Schmieder, Johannes F. & Wachter, Till von & Bender, Stefan, 2014.
"The Causal Effect of Unemployment Duration on Wages: Evidence from Unemployment Insurance Extensions,"
IZA Discussion Papers
8700, Institute for the Study of Labor (IZA).
- Johannes F. Schmieder & Till von Wachter & Stefan Bender, 2013. "The Causal Effect of Unemployment Duration on Wages: Evidence from Unemployment Insurance Extensions," NBER Working Papers 19772, National Bureau of Economic Research, Inc.
- Federico Ravenna & Carl E. Walsh, 2011.
"Welfare-Based Optimal Monetary Policy with Unemployment and Sticky Prices: A Linear-Quadratic Framework,"
American Economic Journal: Macroeconomics,
American Economic Association, vol. 3(2), pages 130-62, April.
- Federico Ravenna & Carl E. Walsh, 2009. "Welfare-based optimal monetary policy with unemployment and sticky prices: a linear-quadratic framework," Working Paper Series 2009-15, Federal Reserve Bank of San Francisco.
- Ravenna, Federico & Walsh, Carl E., 2012. "Monetary policy and labor market frictions: A tax interpretation," Journal of Monetary Economics, Elsevier, vol. 59(2), pages 180-195.
- Julen Esteban-Pretel & Elisa Faraglia, 2005.
"Monetary Shocks in a Model with Loss of Skills,"
CIRJE-F-380, CIRJE, Faculty of Economics, University of Tokyo.
- Addison, John T & Portugal, Pedro, 1989. "Job Displacement, Relative Wage Changes, and Duration of Unemployment," Journal of Labor Economics, University of Chicago Press, vol. 7(3), pages 281-302, July.
When requesting a correction, please mention this item's handle: RePEc:cfm:wpaper:1415. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martin Hannon)
If references are entirely missing, you can add them using this form.