(Dis)Solving the Zero Lower Bound Equilibrium through Income Policy. Issue 2 (14th December 2021)

• Record Type: Journal Article
• Authors: ASCARI, GUIDO; BONCHI, JACOPO
• Is Part Of: Journal of money, credit, and banking. Volume 54:Issue 2/3(2022)
• Page Start: 519
• Page End: 535
• Publication Date: 2021-12-14
• Subjects: inflation expectations -- wage indexation -- zero lower bound; Banks and banking -- Periodicals; Credit -- Periodicals; Money -- Periodicals; 332
• DOI: 10.1111/jmcb.12884
• Languages: English
• ISSNs: 0022-2879

Abstract

Abstract: 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. 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.