Gains from Wage Flexibility and the Zero Lower Bound
35 Pages Posted: 16 Jun 2020
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Gains from Wage Flexibility and the Zero Lower Bound
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: Suggested Citation