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Monetary Shocks in a Model with Loss of Skills

  • Julen Esteban-Pretel

    (Faculty of Economics, University of Tokyo)

  • Elisa Faraglia

    (London Business School)

Unemployment shows persistent and long lasting responses to nominal and real shocks. Standard real business cycle models with search frictions but homogeneous labor force are able to generate some 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 big and well known. One of the causes/consequences of long-term unemployment is the skill deterioration of the unemployment pool. In this paper we introduce the loss of skill mechanism, and therefore an heterogeneous labor force, in a New Keynesian framework with search frictions. Calibrating the model to the Spanish economy, we show that the loss of skill mechanism helps to explain the persistence in the response of unemployment to monetary shocks.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-380.

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Length: 34 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:tky:fseres:2005cf380
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