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(Dis)Solving the Zero Lower Bound Equilibrium through Income Policy

Guido Ascari () and Jacopo Bonchi ()

No 10/19, Working Papers from Sapienza University of Rome, DISS

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. 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 zero lower bound steady state equilibrium in an OLG model featuring “secular stagnation” and in a infinite-life model, where this equilibrium emerges due to deflationary expectations.

Keywords: zero lower bound; wage indexation; income policy; inflation expectations. (search for similar items in EconPapers)
JEL-codes: E31 E52 E64 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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