The Taylor Principle and (In-)Determinacy in a New Keynesian Model with Hiring Frictions and Skill Loss

Abstract

We introduce duration dependent skill decay among the unemployed into a NewKeynesian model with hiring frictions developed by Blanchard/Gali (2008). If the central bank responds only to (current, lagged or expected future) in ‡ation and quarterly skill decay is above a threshold level, determinacy requires a coe¢ cient on in ‡a-tion smaller than one. The threshold level is plausible with little steady-state hiring and …ring ("Continental European Calibration") but implausibly high in the opposite case ("American calibration"). Neither interest rate smoothing nor responding to the output gap helps to restore determinacy if skill decay exceeds the threshold level. However, a modest response to unemployment guarantees determinacy.Moreover, under indeterminacy, both an adverse sunspot shock and an adverse technology shock increase unemployment extremely persistently.

The Taylor Principle and (In-) Determinacy With Hiring Frictions and Skill Loss

“…14. In the absence of skill decay (δ s = 0) and habit formation (h = 0), it is possible to establish the conditions for determinacy for an interest feedback rule where the central bank responds only to inflation analytically, as we show in Rannenberg (2009), by reducing it to a system of two jump variables and one predetermined variable and then applying conditions derived by Woodford (2003) for such systems. In contrast, with skill decay the model has three forward-looking variables and three state variables.…”

A Note on Trend Growth and Learning About Monetary Policy Rules in a Two-Block World Economy

“…2 Some papers focus only on determinacy or learnability issues. These include, among others, Lubik and Krause (2004), Surico (2008), Ascari and Ropele (2009), Rannenberg (2010), Coiboin and Gorodnichenko (2011), and Kobayashi and Muto (2013). Lubik and Krause (2004) analyze determinacy in a search and matching model of the labor market, whereas Rannenberg (2010) focuses on the effect of skill loss during unemployment.…”

“…These include, among others, Lubik and Krause (2004), Surico (2008), Ascari and Ropele (2009), Rannenberg (2010), Coiboin and Gorodnichenko (2011), and Kobayashi and Muto (2013). Lubik and Krause (2004) analyze determinacy in a search and matching model of the labor market, whereas Rannenberg (2010) focuses on the effect of skill loss during unemployment. Surico (2008) examines determinacy under a cost channel of interest rate, and whereas Ascari and Ropele (2009) and Coiboin and Gorodnichenko (2011) study determinacy under positive trend inflation, Kobayashi and Muto (2013) focus on learnability.…”

Learning about monetary policy rules when labor market search and matching frictions matter

“…Tesfaselassie and Schaling (2009) show the importance of the size of the hiring costs for the policy response to unemployment that ensures determinacy and E-stability. Rannenberg (2009) introduces skill decay during unemployment into the model and analyzes its implications for the Taylor principle.…”