Missing Disinflation and Human Capital Depreciation

Abdoulaye Millogo and Jean-François Rouillard

Cahiers de recherche from Departement d'économique de l'École de gestion à l'Université de Sherbrooke

Abstract: In line with New-Keynesian predictions and certain historical trajectories that tracked by inflation during past crises, the context of the Great Recession should have spurred a sharp fall in inflation or even deflation. On the contrary, the sensitivity of inflation to changes in unemployment has diminished, giving rise to the paradox of missing disinflation. By investigating this paradox, this article develops a variant of the New-Keynesian models where mechanisms of depreciation of human capital are implemented. In the model, rising unemployment translates into a relatively large increase in long-term unemployment. Unemployed people with low levels of human capital become dominant and more workers are now likely to suffer from depreciation of human capital. The depreciation weakens the intensity with which the unemployed prospect new jobs and moderates the decline in wages and prices. Calibrated to the United States economy, model simulations show that this model variant compares relatively better the highlights of missing disinflation than a New-Keynesian without depreciation of human capital. In response to shocks of the same size, the response of inflation in the model with depreciation of human capital is 3 to 4-fold less than in standard New-Keynesian models.

Keywords: Missing Disinflation; Deflation; Human Capital Depreciation; Unemployment; Great Recession (search for similar items in EconPapers)
JEL-codes: E31 E32 J24 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2019-08, Revised 2020-10
New Economics Papers: this item is included in nep-dge, nep-lma, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:shr:wpaper:19-03

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