Endogenous growth, skill obsolescence and optimal monetary policy

We analyze Ramsey optimal monetary policy in a New-Keynesian model with search and matching fric- tions 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 internal- ize 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 ver- sion of the full model we show significant deviations from price stability and significant differences be- tween optimal monetary policy and monetary policy that follows a Taylor rule.