Abstract
AbstractWe 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.
Highlights
Inflation rate in Italy was about 6% at the beginning of the ‘90s and it needed to decrease by about 4% in few years to satisfy the inflation Maastricht criterion
We propose to impose a lower bound on wage inflation: an income policy based on a downward nominal wage rigidity (DNWR) such that wage inflation cannot be lower than a fraction of the intended inflation target
The DNWR acts as a coordination device that destroys the bad zero lower bound (ZLB) equilibrium
Summary
Inflation rate in Italy was about 6% at the beginning of the ‘90s and it needed to decrease by about 4% in few years to satisfy the inflation Maastricht criterion. EMR show that an increase in the inflation target in their model allows for a better outcome, but it cannot exclude a secular stagnation equilibrium They propose other possible demand-side solutions (especially fiscal policy). According to commentaries and statements from government officials, the idea of a lack in consumption demand is behind the call for the wage increase We argue this is the wrong way of looking at the problem: our solution is a supply side one. Expectations are such that the economy is trapped in a low inflation equilibrium, and a DNWR based on a minimal wage inflation is the supply side cure.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
