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. Our proposed income policy relies on the same mechanism behind past disinflationary policies, but it works in the opposite direction. It is for- malized as a downward nominal wage growth rigidity (DNWGR), 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 OLG model featuring “secular stagnation” and in an infinite-life model, where this equilibrium emerges due to deflationary expectations.
Click on the PDF file below to read the paper.
|Dis-solving the ZLB Equilibrium.pdf||748.9 KB|