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

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JournalMacroeconomic Dynamics
DateAccepted/In press - 22 Feb 2017
DateE-pub ahead of print - 22 Jun 2017
DatePublished (current) - Jun 2019
Issue number4
Volume23
Number of pages30
Pages (from-to)1371-1400
Early online date22/06/17
Original languageEnglish

Abstract

The paper revisits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifies 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, labor market segmentation is shown to have a significant influence 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.

    Research areas

  • Government Spending, Income Tax, Inflation, Labor Market, Strategic Complementarity, Zero Lower Bound

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