NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Gains from wage Flexibility and the Zero Lower Bound

Roberto M. Billi, Jordi Galí

NBER Working Paper No. 27386
Issued in June 2020
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

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.

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Document Object Identifier (DOI): 10.3386/w27386

 
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