 |
(Dis)Solving the ZLB equilibrium through Income Policy
1 : Sapienza - University of Rome
2 : University of Oxford
We investigate the possibility to reflate an economy experiencing a long-lasting
ZLB 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 formalized as
a downward nominal wage rigidity (DNWR) such that wage inflation cannot be lower
than a fraction of the inflation target. This policy allows to dissolve the ZLB steady
state equilibrium in an OLG model featuring “secular stagnation” and in a infinite-life
model, where this equilibrium emerges due to deflationary expectations.
