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Gains from Wage Flexibility and the Zero Lower Bound

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  • Roberto M. Billi
  • Jordi Galí

Abstract

We analyze the welfare impact of greater wage flexibility while taking into account explicitly the existence of the 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 presence of the ZLB implies that an increase in wage flexibility reduces welfare even under the optimal monetary policy with commitment.

Suggested Citation

  • Roberto M. Billi & Jordi Galí, 2018. "Gains from Wage Flexibility and the Zero Lower Bound," Working Papers 1066, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:1066
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    Cited by:

    1. Fabio Busetti & Stefano Neri & Alessandro Notarpietro & Massimiliano Pisani, 2020. "Monetary policy strategies in the New Normal: a model-based analysis for the euro area," Temi di discussione (Economic working papers) 1308, Bank of Italy, Economic Research and International Relations Area.
    2. Galí, Jordi, 2020. "The effects of a money-financed fiscal stimulus," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 1-19.
    3. Consolo, Agostino & Koester, Gerrit & Nickel, Christiane & Porqueddu, Mario & Smets, Frank, 2021. "The need for an inflation buffer in the ECB’s price stability objective – the role of nominal rigidities and inflation differentials," Occasional Paper Series 279, European Central Bank.
    4. Bonciani, Dario & Oh, Joonseok, 2020. "Monetary policy inertia and the paradox of flexibility," Bank of England working papers 888, Bank of England.
    5. Bonciani, Dario & Oh, Joonseok, 2021. "Unemployment risk, liquidity traps and monetary policy," Bank of England working papers 920, Bank of England.
    6. Harrison, Richard & Waldron, Matt, 2021. "Optimal policy with occasionally binding constraints: piecewise linear solution methods," Bank of England working papers 911, Bank of England.

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    More about this item

    Keywords

    labor market flexibility; Nominal rigidities; optimal monetary policy with commitment; Taylor rule; ZLB;
    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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