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Gains from Wage Flexibility and the Zero Lower Bound

Author

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  • Billi, Roberto

    (Research Department, Central Bank of Sweden)

  • Galí, Jordi

    (CREI, UPF and Barcelona GSE)

Abstract

We analyze the welfare impact of greater wage exibility 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 exibility 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 exibility reduces welfare even under the optimal monetary policy with commitment.

Suggested Citation

  • Billi, Roberto & Galí, Jordi, 2019. "Gains from Wage Flexibility and the Zero Lower Bound," Working Paper Series 367, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0367
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    Cited by:

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    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. Sebastian Diz & Mario Giarda & Damián Romero, 2021. "Inequality, Nominal Rigidities, and Aggregate Demand," Working Papers Central Bank of Chile 929, Central Bank of Chile.
    5. Billi, Roberto M., 2022. "Inflation Targeting or Fiscal Activism?," Working Paper Series 412, Sveriges Riksbank (Central Bank of Sweden).
    6. Ou, Shengliang & Zhang, Donghai & Zhang, Renbin, 2021. "Information frictions, monetary policy, and the paradox of price flexibility," Journal of Monetary Economics, Elsevier, vol. 120(C), pages 70-82.
    7. Bonciani, Dario & Oh, Joonseok, 2020. "Monetary policy inertia and the paradox of flexibility," Bank of England working papers 888, Bank of England.
    8. Abbritti, Mirko & Consolo, Agostino & Weber, Sebastian, 2021. "Endogenous growth, downward wage rigidity and optimal inflation," Working Paper Series 2635, European Central Bank.
    9. Nunes, Ricardo & Park, Donghyun & Rondina, Luca, 2021. "Imperfect credibility, sticky wages, and welfare," Journal of Macroeconomics, Elsevier, vol. 70(C).
    10. Carl E. Walsh, 2019. "Alternatives to Inflation Targeting in Low Interest Rate Environments," IMES Discussion Paper Series 19-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
    11. Bonciani, Dario & Oh, Joonseok, 2021. "Unemployment risk, liquidity traps and monetary policy," Bank of England working papers 920, Bank of England.
    12. 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 exibility; 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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