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Credit Crunch and Downward Nominal Wage Rigidities

Author

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  • Jean-François Rouillard

    (Département d'économique, Université de Sherbrooke)

Abstract

Through the lens of a dynamic general equilibrium model that features financial frictions and downward nominal wage rigidities (DNWR), I simulate a credit crunch similar to the one experienced by the US during the 2007-09 recession. Since the constraint on nominal wage inflation binds, this induces important cutbacks in hours worked. For a 2% inflation-target regime, the maximal deviation of hours worked is 2.15 greater with DNWR than with flexible wages. Total losses in hours worked are also 27% lower when the inflation target is elevated from 2% to 4%. Moreover, the model can account for a large part of the upward shift in the labor wedge that occurred during the recession. This result arises because the marginal rate of substitution of consumption for leisure significantly deviates from real wages with DNWR.

Suggested Citation

  • Jean-François Rouillard, 2017. "Credit Crunch and Downward Nominal Wage Rigidities," Cahiers de recherche 17-05, Departement d'économique de l'École de gestion à l'Université de Sherbrooke, revised Apr 2019.
    • Handle: RePEc:shr:wpaper:17-05
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    File URL: http://gredi.recherche.usherbrooke.ca/wpapers/GREDI-1705.pdf
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    References listed on IDEAS

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    Cited by:

    1. Victor Domansky & Victoria Kreps, 2012. "Game-theoretic model of financial markets with two risky assets," HSE Working papers WP BRP 16/EC/2012, National Research University Higher School of Economics.

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    More about this item

    Keywords

    borrowing constraints; monetary policy; in flation target; labor wedge.;
    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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