Gains from Wage Flexibility and the Zero Lower Bound*

Roberto M. Billi · Jordi Galí Y

15 citations0/0 files storedOxford Bulletin of Economics and Statistics

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

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.

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References

1936The General Theory of Employment, Interest and Money.1993Discretion versus policy rules in practice 2000Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory*2005The Cyclical Behavior of Equilibrium Unemployment and Vacancies 2000Optimal monetary policy with staggered wage and price contracts 2011When Is the Government Spending Multiplier Large?2003Zero Bound on Interest Rates and Optimal Monetary Policy 2005Employment Fluctuations with Equilibrium Wage Stickiness

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