The Taylor principle and (in-)determinacy in a New Keynesian model with hiring frictions and skill loss

Ansgar Rannenberg

No 208, Working Paper Research from National Bank of Belgium

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.

Keywords: Monetary policy rules; Taylor principle; Determinacy; Hysteresis; Skill decay (search for similar items in EconPapers)
JEL-codes: E24 E32 E52 J64 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2010-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: The Taylor Principle and (In-) Determinacy in a New Keynesian Model with hiring Frictions and Skill Loss (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:201010-208

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