The Taylor Principle and (In-) Determinacy in a New Keynesian Model with hiring Frictions and Skill Loss
We introduce duration dependent skill decay among the unemployed into a New-Keynesian model with hiring frictions developed by Blanchard/Gali (2008). If the central bank responds only to (current, lagged or expected future) inflation and quarÂ¬terly skill decay is above a threshold level, determinacy requires a coefficient on inflaÂ¬tion smaller than one. The threshold level is plausible with little steady-state hiring and firing ("Continental European Calibration") but implausibly high in the oppoÂ¬site case ("American calibration"). Neither interest rate smoothing nor responding to the output gap helps to restore determinacy if skill decay exceeds the threshold level. However, a modest response to unemployment guarantees determinacy. Moreover, under indeterminacy, both an adverse sunspot shock and an adverse technology shock increase unemployment extremely persistently.
|Date of creation:||15 Sep 2009|
|Date of revision:|
|Contact details of provider:|| Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL|
Phone: 01334 462420
Fax: 01334 462444
Web page: http://www.st-andrews.ac.uk/cdma
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:san:cdmawp:0909. 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: (the School of Economics)
If references are entirely missing, you can add them using this form.