Download This Paper(Dis)Solving the Zero Lower Bound Equilibrium Through Income Policy
LUISS School of European Political Economy WP Series 7/2020
54 Pages Posted: 3 Mar 2021
Date Written: November 5, 2020
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 growth rigidity (DNWGR), such that wage inflation cannot be lower than a fraction of the inflation target. This policy allows dissolving the zero lower bound steady state equilibrium in an OLG model featuring “secular stagnation” and in an infinite-life model, where this equilibrium emerges due to deflationary expectations.
Keywords: Zero Lower Bound, Wage Indexation, Inflation Expectations
JEL Classification: E31, E52, E64
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