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G. Ascari, J. Bonchi: (Dis)Solving the Zero Lower Bound Equilibrium through Income Policy

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.

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