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Real Rigidities and Optimal Stabilization at the Zero Lower Bound in New Keynesian Economies

Author

Listed:
  • Adiya Belgibayeva

    (Birkbeck, University of London)

  • Michal Horvath

    (University of York)

Abstract

The paper re-visits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifies strategic interaction among price- and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labour market segmentation is shown to have a significant influence on the length of the forward commitment to keep interest rates at zero, the magnitude of the fiscal policy responses as well as inflation volatility in the economy under optimal policy.

Suggested Citation

  • Adiya Belgibayeva & Michal Horvath, 2017. "Real Rigidities and Optimal Stabilization at the Zero Lower Bound in New Keynesian Economies," Birkbeck Working Papers in Economics and Finance 1701, Birkbeck, Department of Economics, Mathematics & Statistics.
  • Handle: RePEc:bbk:bbkefp:1701
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    File URL: https://eprints.bbk.ac.uk/id/eprint/19114
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    References listed on IDEAS

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    1. Horvath, Roman & Kaszab, Lorant & Marsal, Ales & Rabitsch, Katrin, 2020. "Determinants of fiscal multipliers revisited," Journal of Macroeconomics, Elsevier, vol. 63(C).
    2. Ji, Yangyang, 2022. "Can Discounting Alone Resolve the Forward Guidance Puzzle?," MPRA Paper 115353, University Library of Munich, Germany.

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    More about this item

    Keywords

    zero lower bound; strategic complementarity; labour market; inflation; income tax; government spending.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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