Ansgar Rannenberg: Explaining European unemployment with a New Keynesian New Growth model

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Explaining European unemployment with a New Keynesian New Growth model

32 pp.
4.85 EUR
(October 2009)

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The chapter by Ansgar Rannenberg on “Explaining European unemployment with a New Keynesian New Growth model” introduces endogenous growth via capital stock externalities into an otherwise standard New Keynesian model with capital accumulation and unemployment. Rannenberg subjects the model to a cost-push shock lasting for one quarter, in order to mimic a scenario akin to the one faced by central banks at the end of the 1970s. Monetary policy implements disinflation by following a standard interest feedback rule calibrated to an estimate of German Bundesbank reaction function. 40 quarters after the shock has vanished, unemployment is still about 1.8 percentage points above its steady state, while productivity growth has decreased. The author is also able to coarsely reproduce cross country differences in unemployment. A higher disinflation generated by a larger cost-push shock causes a stronger persistent increase in unemployment. For a given cost push shock, a policy rule of the Bundesbank produces a stronger persistent increase than the rule of the US Federal Reserve Bank.

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