Gains from wage Flexibility and the Zero Lower Bound
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.
We thank Pierrick Clerc, Yoon J. Jo, Michael Kumhof, Cristina Manea, Ales Marsal, Francesco Zanetti, and two anonymous referees for useful comments. Galí acknowledges financial support from the Spanish Ministry of Economy and Competitiveness, through an I+D Grant (ECO2017-87827) and the Severo Ochoa Programme for Centres of Excellence in R&D (SEV-2015-0563). The views expressed herein are solely the responsibility of the authors and should not be interpreted as reflecting the views of Sveriges Riksbank or the National Bureau of Economic Research.
Roberto M. Billi & Jordi Galí, 2021. "Gains from Wage Flexibility and the Zero Lower Bound," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(6), pages 1239-1261, December. citation courtesy of
Roberto M. Billi & Jordi Galí, 2021. "Gains from Wage Flexibility and the Zero Lower Bound*," Oxford Bulletin of Economics and Statistics, vol 82(6), pages 1239-1261.