Gains from wage Flexibility and the Zero Lower Bound
We analyze the welfare impact of greater wage flexibility in the presence of an occasionally binding zero lower bound (ZLB) constraint on the nominal interest rate. We show that the ZLB constraint generally amplifies the adverse effects of greater wage flexibility on welfare when the central bank follows a conventional Taylor rule. When demand shocks are the driving force, the ZLB implies that an increase in wage flexibility reduces welfare even under the optimal monetary policy with commitment.
Published Versions
Roberto M. Billi & Jordi Galí, 2021. "Gains from Wage Flexibility and the Zero Lower Bound," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(6), pages 1239-1261, December. citation courtesy of 
Roberto M. Billi & Jordi Galí, 2021. "Gains from Wage Flexibility and the Zero Lower Bound*," Oxford Bulletin of Economics and Statistics, vol 82(6), pages 1239-1261.
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