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We introduce duration,dependent,skill decay among,the unemployed,into a New- Keynesian model,with hiring frictions developed,by Blanchard/Gali (2008). If the central bank responds only to (current, lagged or expected future) in‡ation and quar- terly 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 oppo- site 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. Contents

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