Long-term Unemployment over the Business Cycle, Skill Loss, and Monetary Policy

Daniel Kienzler ()

No 1205, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: Movements in long-term unemployment (LTU) exhibit a substantial cyclical component. I develop a business cycle model featuring labor market frictions and skill loss during unemployment to capture various stylized facts about the cyclical behavior of long-term unemployment. I find that the skill loss mechanism helps reproduce negative duration dependence, high persistence in unemployment and output, volatility patterns across macroeconomic variables and the behavior of the incidence of LTU around business cycle turning points. Optimal monetary policy in the presence of skill loss during unemployment calls for a softer reaction to inflation after productivity shocks. The monetary authority accepts more inflation in order to avoid high skill loss during unemployment which would reduce production and hence consumption possibilities.

Keywords: Long-term unemployment; business cycle; optimal monetary policy. (search for similar items in EconPapers)
JEL-codes: E24 E32 E52 J24 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2012-10
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2012:05

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