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Gains from Wage Flexibility and the Zero Lower Bound*

Year: 2020

Type: article

Abstract: We analyse the welfare impact of greater wage flexibility in the presence of an occasionally binding zero lower bound (ZLB) constraint on the nominal interest rate. We show that the ZLB constraint generally amplifies the adverse effects of greater wage flexibility on welfare when the central bank follows a conventional Taylor rule. When demand shocks are the driving force, the ZLB implies that an increase in wage flexibility reduces welfare even under the optimal monetary policy with commitment.

Source: Oxford Bulletin of Economics and Statistics

DOI: 10.1111/obes.12381

Authors: Roberto M. Billi, Jordi Galí

Institutions: Swedish National Bank, Universitat Pompeu Fabra, Centre de Recerca en Economia Internacional, Barcelona School of Economics

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $3,000