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Endogenous growth, skill obsolescence and output hysteresis in a New Keynesian model with unemployment

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  • Lechthaler, Wolfgang
  • Tesfaselassie, Mewael F.
Abstract
We embed human capital-based endogenous growth into a New-Keynesian model with search and matching frictions in the labor market and skill obsolescence from long-term unemployment. The model can account for key features of the Great Recession: a decline in productivity growth, the relative stability of inflation despite a pronounced fall in output (the "missing disinflation puzzle"), and a permanent gap between output and the pre-crisis trend output. In the model, lower aggregate demand raises unemployment and the training costs associated with skill obsolescence. Lower employment hinders learning-by-doing, which slows down human capital accumulation, feeding back into even fewer vacancies than justified by the demand shock alone. These feedback channels mitigate the disinflationary effect of the demand shock while amplifying its contractionary effect on output. The temporary growth slowdown translates into output hysteresis (permanently lower output and labor productivity).

Suggested Citation

  • Lechthaler, Wolfgang & Tesfaselassie, Mewael F., 2021. "Endogenous growth, skill obsolescence and output hysteresis in a New Keynesian model with unemployment," IMFS Working Paper Series 149, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    • Handle: RePEc:zbw:imfswp:149
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    Cited by:

    1. Wolfgang Lechthaler & Mewael F. Tesfaselassie, 2023. "Endogenous Growth, Skill Obsolescence, and Output Hysteresis in a New Keynesian Model with Unemployment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(8), pages 2187-2213, December.
    2. Lechthaler, Wolfgang & Tesfaselassie, Mewael F., 2021. "Endogenous growth, skill obsolescence and fiscal multipliers," Kiel Working Papers 2184, Kiel Institute for the World Economy (IfW Kiel).

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    More about this item

    Keywords

    endogenous growth; search and matching; unemployment; nominal rigidity; output hysteresis; monetary policy;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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