Department of Economics and Business - Universitat Pompeu Fabra

Title:: Gains from wage flexibility and the zero lower bound
Authors:: Roberto M. Billi and Jordi Galí
Date:: December 2018 (Revised: February 2019)
Abstract:: We analyze the welfare impact of greater wage flexibility while taking into account explicitly the existence of the 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 presence of the ZLB implies that an increase in wage áexibility reduces welfare even under the optimal monetary policy with commitment.
Keywords:: labor market, flexibility, nominal rigidities, optimal monetary policy with commitment, Taylor rule, ZLB
JEL codes:: E24, E32, E52
Area of Research:: Macroeconomics and International Economics

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