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Monetary Shocks in a Model with Skill Loss
Author(s) -
ESTEBANPRETEL JULEN,
FARAGLIA ELISA
Publication year - 2010
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2010.00340.x
Subject(s) - unemployment , economics , business cycle , homogeneous , new keynesian economics , volatility (finance) , persistence (discontinuity) , mechanism (biology) , empirical evidence , macroeconomics , keynesian economics , labour economics , monetary policy , econometrics , philosophy , physics , geotechnical engineering , epistemology , engineering , thermodynamics
Unemployment shows persistent and long‐lasting responses to nominal and real shocks. Standard real business cycle models with search frictions but a homogeneous labor force are able to generate some volatility and persistence, but not enough to match the empirical evidence. Moreover, empirical studies emphasize the importance of the heterogeneity of the unemployment pool to fully understand unemployment dynamics. In particular, in most European countries the incidence of long‐term unemployment is large and well known. One of the possible causes/consequences of long‐term unemployment is the skill deterioration of the unemployment pool. In this paper, we introduce the skill loss mechanism, and therefore a heterogeneous labor force, in a New Keynesian framework with search frictions. Calibrating the model for the Spanish economy, we show that while the skill loss mechanism helps to explain the magnitude of the response of unemployment to monetary shocks, it does not improve the performance of the homogeneous worker model in terms of the persistence of the response, especially for short‐ and long‐term unemployment.