We investigate the possibility to reflate an economy experiencing a long-lasting zero lower bound episode with subdued or negative inflation by imposing a minimum level of wage inflation. The income policy under investigation is formalized as a downward nominal wage growth rigidity, such that wage inflation cannot be lower than a fraction of the inflation target. This policy allows dissolving the zero lower bound steady-state equilibrium in an Overlapping Generations (OLG) model featuring "secular stagnation" and in an infinite-life model, where this equilibrium emerges due to deflationary expectations.
(Dis)Solving the Zero Lower Bound Equilibrium through Income Policy / Guido Ascari; Jacopo Bonchi. - In: JOURNAL OF MONEY, CREDIT, AND BANKING. - ISSN 0022-2879. - ELETTRONICO. - 54:2-3(2022), pp. 519-535. [10.1111/jmcb.12884]
(Dis)Solving the Zero Lower Bound Equilibrium through Income Policy
Jacopo Bonchi
2022
Abstract
We investigate the possibility to reflate an economy experiencing a long-lasting zero lower bound episode with subdued or negative inflation by imposing a minimum level of wage inflation. The income policy under investigation is formalized as a downward nominal wage growth rigidity, such that wage inflation cannot be lower than a fraction of the inflation target. This policy allows dissolving the zero lower bound steady-state equilibrium in an Overlapping Generations (OLG) model featuring "secular stagnation" and in an infinite-life model, where this equilibrium emerges due to deflationary expectations.File | Dimensione | Formato | |
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