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Optimal Monetary Policy with Learning by Doing

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  • Chris Redl

Abstract

I study the implications of learning by doing in production for optimal monetary policy using a basic New Keynesian model. Learning-by-doing is modeled as a stock of skills that accumulates based on past employment. The presence of this learning-by-doing externality breaks the ’divine coincidence’ result, that by stabilising inflation the output gap will automatically be closed, for a variety of shocks that are important in explaining the buseiness cycle. In this context, the policy maker must consider the impact on future productivity of any trade-off between output and inflation today. The appropriate inflation-output trade off is between inflation today and the present value of deviations in the output gap. The approach to optimal monetary policy follows Woodford (2010) permitting a study of variations in key parameters and steady states which is uncommon in the literature that relies on a quadratic approximation to the utility function. Exploiting this variation I find that learning induces a small increase in the importance of the output gap under a cost-push shock for the (more realistic case) of a distorted steady state. The welfare costs of business cycles are shown to be significantly larger even under the optimal policy.

Suggested Citation

  • Chris Redl, 2015. "Optimal Monetary Policy with Learning by Doing," Working Papers 490, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:490
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    File URL: https://www.econrsa.org/node/993
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    Cited by:

    1. Dolado, Juan J. & Motyovszki, Gergö & Pappa, Evi, 2018. "Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity," IZA Discussion Papers 11494, Institute of Labor Economics (IZA).

    More about this item

    Keywords

    Monetary policy; Labor Productivity; Inflation;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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