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THE TAYLOR PRINCIPLE AND (IN-) DETERMINACY WITH HIRING FRICTIONS AND SKILL LOSS

Published online by Cambridge University Press:  17 January 2014

Ansgar Rannenberg
Ansgar Rannenberg*
Affiliation:
Macroeconomic Policy Institute, Hans-Böckler Foundation
*
Address correspondence to: Ansgar Rannenberg, International Business-Cycle Analysis and Economic Policy Unit, Hans-Böckler-Stiftung Macroeconomic Policy Institute (IMK), Hans-Böckler-Str. 39, 40476 Düsseldorf, Germany; e-mail: [email protected]; www.imk-boeckler.de.
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Abstract

We introduce skill decay during unemployment into a 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” labor 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.

Keywords

Monetary Policy RulesTaylor PrincipleDeterminacySkill Decay
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 5 , July 2015 , pp. 1045 - 1073
Copyright
Copyright © Cambridge University Press 2014 

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