See Christiano, Eichenbaum, and Evans (1999) for a review of this literature.
Monetary Shocks in a Model with Skill Loss
Article first published online: 6 SEP 2010
© 2010 The Ohio State University
Journal of Money, Credit and Banking
Volume 42, Issue 7, pages 1235–1265, October 2010
How to Cite
ESTEBAN-PRETEL, J. and FARAGLIA, E. (2010), Monetary Shocks in a Model with Skill Loss. Journal of Money, Credit and Banking, 42: 1235–1265. doi: 10.1111/j.1538-4616.2010.00340.x
We would like to acknowledge the support and guidance of Mark Gertler and Ricardo Lagos. We are also grateful to Andrew Scott and Antonella Trigari for their help and comments. All errors are our own.
- Issue published online: 6 SEP 2010
- Article first published online: 6 SEP 2010
- Received January 8, 2009; and accepted in revised form March 17, 2010.
- business cycles;
- skill loss;
- monetary policy;
- search and matching
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.