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The Taylor principle and (in-) determinancy in a New Keynesian model with hiring frictions and skill loss. NBB Working Paper No. 208, November 2010

Rannenberg., Ansgar (2010) The Taylor principle and (in-) determinancy in a New Keynesian model with hiring frictions and skill loss. NBB Working Paper No. 208, November 2010. [Working Paper]

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    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.

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    Item Type: Working Paper
    Uncontrolled Keywords: Monetary policy rules; Taylor principle; Determinacy; Hysteresis; Skill decay.
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > monetary policy
    EU policies and themes > Policies & related activities > employment/labour market > employment/unemployment
    Subjects for EU documents: UNSPECIFIED
    EU Series: UNSPECIFIED
    ["eprint_fieldname_eusries" not defined]: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > National Bank of Belgium (Brussels) > Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 22 Feb 2011 21:22
    Number of Pages: 75
    Last Modified: 22 Feb 2011 21:22
    URI: http://aei.pitt.edu/id/eprint/29761

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