(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

See all articles by Guido Ascari

Guido Ascari

De Nederlandsche Bank; University of Pavia

Jacopo Bonchi

Luiss Guido Carli University

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

Suggested Citation

Ascari, Guido and Ascari, Guido and Bonchi, Jacopo, (Dis)Solving the Zero Lower Bound Equilibrium Through Income Policy (November 5, 2020). LUISS School of European Political Economy WP Series 7/2020, Available at SSRN: https://ssrn.com/abstract=3756405 or http://dx.doi.org/10.2139/ssrn.3756405

Guido Ascari

De Nederlandsche Bank ( email )

Netherlands

University of Pavia

Jacopo Bonchi (Contact Author)

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

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