Working Paper: NBER ID: w27386
Authors: Roberto M. Billi; Jordi Gal
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.
Keywords: Wage Flexibility; Zero Lower Bound; Welfare; Monetary Policy
JEL Codes: E24; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in wage flexibility (J38) | reduces welfare (I38) |
| demand shocks (E39) | larger welfare losses with increased wage flexibility (F66) |
| downward adjustment in labor costs through wage subsidy (J38) | deepen economic downturns (F44) |
| ZLB constraint (E62) | amplifies welfare losses associated with wage flexibility (F66) |
| ZLB binding (F16) | increases range of nominal rigidities for welfare losses (D69) |
| ZLB constraint (E62) | greater welfare losses compared to scenarios without constraint (D69) |