Inequality, Nominal Rigidities, and Aggregate Demand
Mario Giarda () and
Working Papers Central Bank of Chile from Central Bank of Chile
This paper studies wage and price flexibility as a means of absorbing adverse shocks. We focus on economies with unequal access to financial markets and where the monetary authority is constrained by the zero lower bound. We show that the economy becomes more volatile in this setting when wages are more flexible. As our model assumes financial frictions, wage flexibility translates into output volatility via a redistribution channel, which operates through aggregate demand. We find that this volatility depends on the relative wage and price rigidity. Additionally, we show that the redistribution channel gains prominence when the central bank is at the zero lower bound. We conclude that in these kinds of economies, the usual recommendation of making labor markets more flexible to restore high output levels, is mistaken.
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:929
Access Statistics for this paper
More papers in Working Papers Central Bank of Chile from Central Bank of Chile Contact information at EDIRC.
Bibliographic data for series maintained by Alvaro Castillo ().