Endogenous growth, skill obsolescence and optimal monetary policy

Wolfgang Lechthaler and Mewael F. Tesfaselassie

No 2205, Kiel Working Papers from Kiel Institute for the World Economy

Abstract: We analyze Ramsey optimal monetary policy in a New-Keynesian model with search and matching fric- tions featuring (i) training costs due to skill loss from long-term unemployment and (ii) endogenous growth through learning-by-doing externalities. In a simplified two-period version of the model, the competitive equilibrium is shown to be inefficient due to two externalities: i) firms do not internalize the effects that hiring has on labor productivity through learning-by-doing; ii) firms do not fully internal- ize the effects that hiring has on future training costs. These externalities lead to inefficient fluctuations, thereby justifying deviations from price stability in response to productivity shocks. In a calibrated ver- sion of the full model we show significant deviations from price stability and significant differences be- tween optimal monetary policy and monetary policy that follows a Taylor rule.

Keywords: skill loss; human capital growth; unemployment; Ramsey optimal monetary policy; labor market frictions; policy trade-off (search for similar items in EconPapers)
JEL-codes: E24 E52 (search for similar items in EconPapers)
Date: 2021
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Journal Article: Endogenous Growth, Skill Obsolescence, and Optimal Monetary Policy (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:320427

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