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
Through the lens of a dynamic 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 in ation binds, this induces important cutbacks in hours worked. For a 2% infl ation- target regime, the minimal deviation of hours worked is 2.15 greater with DNWR than with exible wages. Total losses in hours worked are also 27% lower when the infl ation 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)
New Economics Papers: this item is included in nep-dge, nep-lma and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:shr:wpaper:17-05
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