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Optimal monetary policy in the presence of human capital depreciation during unemployment

Laureys, Lien (2014) Optimal monetary policy in the presence of human capital depreciation during unemployment. CFM discussion paper series (CFM-DP2014-15). Centre For Macroeconomics, London, UK.

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Abstract

When workers are exposed to human capital depreciation during periods of unemployment, hiring affects the unemployment pool’s composition in terms of skills, and hence the economy’s production potential. Introducing human capital depreciation during unemployment into an otherwise standard New Keynesian model with search frictions in the labour market leads to the finding that the flexibleprice allocation is no longer constrained-efficient even when the standard Hosios (1990) condition holds. This is because it generates a composition externality in job creation: firms ignore how their hiring decisions affect the extent to which the unemployed workers’ skills erode, and hence the output that can be produced by new matches. Consequently, it might be desirable from a social point of view for monetary policy to deviate from strict inflation targeting. Although optimal price inflation is no longer zero, strict inflation targeting is shown to stay close to the optimal policy.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2014 The Author
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HG Finance
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 18 Jul 2014 10:38
Last Modified: 11 Jul 2020 23:07
Funders: Ministry of Education, Spain
URI: http://eprints.lse.ac.uk/id/eprint/58006

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