Optimal monetary policy in the presence of human capital depreciation during unemployment

Lien Laureys

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: When workers are exposed to human capital depreciation during periods of unemployment, hiring affects the unemployment pool’s composition in terms of skills, and hence the economy’s production potential. Introducing human capital depreciation during unemployment into an otherwise standard New Keynesian model with search frictions in the labour market leads to the finding that the flexibleprice allocation is no longer constrained-efficient even when the standard Hosios (1990) condition holds. This is because it generates a composition externality in job creation: firms ignore how their hiring decisions affect the extent to which the unemployed workers’ skills erode, and hence the output that can be produced by new matches. Consequently, it might be desirable from a social point of view for monetary policy to deviate from strict inflation targeting. Although optimal price inflation is no longer zero, strict inflation targeting is shown to stay close to the optimal policy.

JEL-codes: F3 G3 J01 N0 R14 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2014-06
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://eprints.lse.ac.uk/58006/ Open access version. (application/pdf)

Related works:
Working Paper: Optimal monetary policy in the presence of human capital depreciation during unemployment (2015)
Working Paper: Optimal monetary policy in the presence of human capital depreciation during unemployment (2014)
Working Paper: Optimal Monetary Policy in the Presence of Human Capital Depreciation during Unemployment (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:58006

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().