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Real Rigidities and Optimal Stabilization at the Zero Lower Bound in New Keynesian Economies

Adiya Belgibayeva and Michal Horvath ()

Discussion Papers from Department of Economics, University of York

Abstract: The paper re-visits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifes strategic interaction among price- and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labour market segmentation is shown to have a signifcant infleuence on the length of the forward commitment to keep interest rates at zero, the magnitude of the fiscal policy responses as well as inflation volatility in the economy under optimal policy.

Keywords: Zero Lower Bound; Strategic Complementarity; Labour Market; Inflation; Income Tax; Government Spending. (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E61 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2017-01
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Working Paper: Real Rigidities and Optimal Stabilization at the Zero Lower Bound in New Keynesian Economies (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:17/01

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