Gains from Wage Flexibility and the Zero Lower Bound

35 Pages Posted: 16 Jun 2020

See all articles by Roberto M. Billi

Roberto M. Billi

Sveriges Riksbank

Jordi Galí

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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Date Written: June 2020

Abstract

We analyze the welfare impact of greater wage flexibility in the presence of an occasionally binding 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 ZLB implies that an increase in wage flexibility reduces welfare even under the optimal monetary policy with commitment.

Keywords: labor-market flexibility, nominal rigidities, optimal monetary policy with commitment, Taylor rule, ZLB constraint

JEL Classification: E24, E32, E52

Suggested Citation

Billi, Roberto M. and Gali, Jordi, Gains from Wage Flexibility and the Zero Lower Bound (June 2020). CEPR Discussion Paper No. DP14888, Available at SSRN: https://ssrn.com/abstract=3628209

Roberto M. Billi (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

HOME PAGE: http://www.rmbilli.com

Jordi Gali

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2754 (Phone)
+34 93 542 1746 (Fax)

HOME PAGE: http://www.econ.upf.es/~gali

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Cambridge, MA 02142
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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