Gains from wage flexibility and the zero lower bound

Billi, Roberto M.; Galí, Jordi, 1961-

doi:http://dx.doi.org/10.1111/obes.12381

Gains from wage flexibility and the zero lower bound

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Billi RM, Galí J. Gains from wage flexibility and the zero lower bound. Oxf Bull Econ Stat. 2020 Dec; 82(6): 1239-61. DOI:10.1111/obes.12381

Abstract

We analyse 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 greaterwage flexibility onwelfare 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.