Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144420
Authors: 
Rannenberg, Ansgar
Year of Publication: 
2010
Series/Report no.: 
Working Paper Research 208
Abstract: 
We introduce skill decay during unemployment into Blanchard and Gali's (2008) New-Keynesian model with hiring frictions and real-wage rigidity. Plausible values of quarterly skill decay and real-wage rigidity turn the long-run marginal cost-unemployment relationship positive in a "European" labour market with little hiring but not in a fluid "American" one. If the marginal cost-unemployment relationship is positive, determinacy requires a passive response to inflation in the central bank's interest feedback rule if the rule features only inflation. Targeting steady state output or unemployment helps to restore determinacy. Under indeterminacy, an adverse sunspot shock increases unemployment extremely persistently.
Subjects: 
Monetary policy rules
Taylor principle
Determinacy
Hysteresis
Skill decay
JEL: 
E24
E52
E32
J64
Document Type: 
Working Paper

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