Downward Nominal Wage Rigidity and Determinacy of Equilibrium

Tomohide Mineyama

Journal of Money, Credit and Banking, 2024, vol. 56, issue 1, 305-316

Abstract: It is well known in the literature that there is a tension between the frequency and duration of the zero lower bound (ZLB) on the nominal interest rate and the determinacy of equilibrium. In this short paper, I show that the presence of downward nominal wage rigidity (DNWR) resolves the tension by preventing a vicious cycle of price declines and output contractions under the ZLB. Consequently, the model with DNWR can replicate the long‐lived ZLB episodes observed in the data. It also implies a plausible size of output and inflation declines at the ZLB.

Date: 2024
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https://doi.org/10.1111/jmcb.13036

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:56:y:2024:i:1:p:305-316

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