Inequality, nominal rigidities, and aggregate demand

Sebastian Diz, Mario Giarda and Damian Romero

European Economic Review, 2023, vol. 158, issue C

Abstract: This paper studies the gains from wage flexibility in a New Keynesian model with price and wage rigidities and incomplete asset markets. When a fraction of households consume solely out of their labor income and have no access to financial markets, the real wage, and therefore, the relative nominal rigidities between wages and prices, directly determine the economy’s aggregate demand. We show that when wages are flexible relative to prices, economic downturns are accompanied by a pronounced decline in real wages, which depresses aggregate demand, and exacerbates the economy’s volatility. In this context, we conclude that enhancing wage flexibility when prices are highly rigid is an undesirable policy prescription.

Keywords: Nominal rigidities; Two-agent models; Business cycles; Monetary policy; Consumption (search for similar items in EconPapers)
JEL-codes: E21 E32 E52 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Inequality, Nominal Rigidities, and Aggregate Demand (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:158:y:2023:i:c:s0014292123001587

DOI: 10.1016/j.euroecorev.2023.104529

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