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Downward Nominal Wage Rigidity and Determinacy of Equilibrium

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  • TOMOHIDE MINEYAMA

Abstract

It is well known in the literature that there is a tension between the frequency and duration of the zero lower bound (ZLB) on the nominal interest rate and the determinacy of equilibrium. In this short paper, I show that the presence of downward nominal wage rigidity (DNWR) resolves the tension by preventing a vicious cycle of price declines and output contractions under the ZLB. Consequently, the model with DNWR can replicate the long‐lived ZLB episodes observed in the data. It also implies a plausible size of output and inflation declines at the ZLB.

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  • Tomohide Mineyama, 2024. "Downward Nominal Wage Rigidity and Determinacy of Equilibrium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(1), pages 305-316, February.
    • Handle: RePEc:wly:jmoncb:v:56:y:2024:i:1:p:305-316
    DOI: 10.1111/jmcb.13036
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