Endogenous Growth, Skill Obsolescence and Optimal Monetary Policy

We analyze Ramsey optimal monetary policy in a New-Keynesian model withsearch and matching frictions featuring (i) training costs due to skill loss fromlong-term unemployment and (ii) endogenous growth through learning-by-doingexternalities. In a simplified two-period version of the model, the competitive equilibriumis shown to be inefficient due to two externalities: i) firms do not internalizethe effects that hiring has on labor productivity through learning-by-doing; ii) firmsdo not fully internalize the effects that hiring has on future training costs. These externalitieslead to inefficient fluctuations, thereby justifying deviations from pricestability in response to productivity shocks. In a calibrated version of the fullmodel we show significant deviations from price stability and significant differencesbetween optimal monetary policy and monetary policy that follows a Taylor rule