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Real Rigidities and Optimal Stabilization at the Zero Lower Bound in New Keynesian Economies
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| Journal | Macroeconomic Dynamics |
|---|---|
| Date | Accepted/In press - 22 Feb 2017 |
| Date | E-pub ahead of print - 22 Jun 2017 |
| Date | Published (current) - Jun 2019 |
| Issue number | 4 |
| Volume | 23 |
| Number of pages | 30 |
| Pages (from-to) | 1371-1400 |
| Early online date | 22/06/17 |
| Original language | English |
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.
- Government Spending, Income Tax, Inflation, Labor Market, Strategic Complementarity, Zero Lower Bound
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