Discussion Paper Details

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Title: Gains from Wage Flexibility and the Zero Lower Bound

Author(s): Roberto M Billi and Jordi Galí

Publication Date: June 2020

Keyword(s): labor-market flexibility, nominal rigidities, optimal monetary policy with commitment, Taylor rule and ZLB constraint

Programme Area(s): Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Billi, R and Galí, J. 2020. 'Gains from Wage Flexibility and the Zero Lower Bound'. London, Centre for Economic Policy Research.