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Credit Crunch and Downward Nominal Wage Rigidities

Jean-François Rouillard ()

Cahiers de recherche from Departement d'Economique de l'École de gestion à l'Université de Sherbrooke

Abstract: Through the lens of a dynamic general equilibrium model that features financial frictions and downward nominal wage rigidities (DNWR), I simulate a credit crunch similar to the one experienced by the US during the 2007-09 recession. Since the constraint on nominal wage inflation binds, this induces important cutbacks in hours worked. For a 2% inflation-target regime, the maximal deviation of hours worked is 2.15 greater with DNWR than with flexible wages. Total losses in hours worked are also 27% lower when the inflation target is elevated from 2% to 4%. Moreover, the model can account for a large part of the upward shift in the labor wedge that occurred during the recession. This result arises because the marginal rate of substitution of consumption for leisure significantly deviates from real wages with DNWR.

Keywords: borrowing constraints; monetary policy; in flation target; labor wedge. (search for similar items in EconPapers)
JEL-codes: E24 E32 E44 E52 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2017-09, Revised 2019-04
New Economics Papers: this item is included in nep-dge, nep-lma and nep-mac
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:shr:wpaper:17-05

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