Gains from Wage Flexibility and the Zero Lower Bound

Recognition Program

Authors: Roberto M. Billi and Jordi Galí

Oxford Bulletin of Economics and Statistics, Vol. 82, No 6, 1239-1261, December, 2020

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 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.

This paper originally appeared as Barcelona School of Economics Working Paper 1066
This paper is acknowledged by the Barcelona GSE Research Recognition Program