Working Paper

Endogenous Growth, Skill Obsolescence and Optimal Monetary Policy

Authors

  • Wolfgang Lechthaler
  • Mewael F. Tesfaselassie
Publication Date

We analyze Ramsey optimal monetary policy in a New-Keynesian model with search and matching frictions 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 internalize 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 version of the full model we show significant deviations from price stability and significant differences between optimal monetary policy and monetary policy that follows a Taylor rule.

Info

JEL Classification
E24; E52

Key Words

  • human capital growth
  • labor market frictions
  • policy trade-off
  • Ramsey optimal monetary policy
  • skill loss
  • unemployment

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