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(Dis)Solving the Zero Lower Bound Equilibrium through Income Policy

Author

Listed:
  • Guido Ascari

    (Department of Economics, University of Oxford (UK).)

  • Jacopo Bonchi

    (Department of Social Sciences and Economics, Sapienza University of Rome (IT).)

Abstract

We investigate the possibility to reflate an economy experiencing a long-lasting zero lower bound episode with subdued or negative inflation, by imposing a minimum level of wage inflation. Our proposed income policy relies on the same mechanism behind past disinflationary policies, but it works in the opposite direction. It is formalized as a downward nominal wage rigidity (DNWR) such that wage inflation cannot be lower than a fraction of the inflation target. This policy allows to dissolve the zero lower bound steady state equilibrium in an OLG model featuring “secular stagnation” and in a infinite-life model, where this equilibrium emerges due to deflationary expectations.

Suggested Citation

  • Guido Ascari & Jacopo Bonchi, 2019. "(Dis)Solving the Zero Lower Bound Equilibrium through Income Policy," Working Papers 10/19, Sapienza University of Rome, DISS.
    • Handle: RePEc:saq:wpaper:10/19
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    References listed on IDEAS

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    9. Stephanie Schmitt-Grohé & Martín Uribe, 2016. "Downward Nominal Wage Rigidity, Currency Pegs, and Involuntary Unemployment," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1466-1514.
    10. Florin O. Bilbiie, 2022. "Neo-Fisherian Policies and Liquidity Traps," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(4), pages 378-403, October.
    11. Gauti B. Eggertsson & Neil R. Mehrotra & Jacob A. Robbins, 2019. "A Model of Secular Stagnation: Theory and Quantitative Evaluation," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(1), pages 1-48, January.
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    15. Andrew Glover, 2018. "Aggregate Effects of Minimum Wage Regulation at the Zero Lower Bound," 2018 Meeting Papers 1285, Society for Economic Dynamics.
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    Cited by:

    1. Pablo Cuba-Borda & Sanjay R. Singh, 2024. "Understanding Persistent ZLB: Theory and Assessment," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(3), pages 389-416, July.
    2. Jacopo Bonchi & Francesco Simone Lucidi, 2020. "How Low Interest Rates Discern the Bubbles Nature: Leveraged vs Unleveraged Bubble," Working Papers 12/20, Sapienza University of Rome, DISS.
    3. Jacopo Bonchi, 2023. "Asset Price Bubbles and Monetary Policy: Revisiting the Nexus at the Zero Lower Bound," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 186-203, January.

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy

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