Downward nominal wage rigidity meets the zero lower bound: FB3-5/2017-16E-PDF

“We add downward nominal wage rigidity to a standard New Keynesian model with stickyprices and wages, where the zero lower bound on nominal interest rates is allowed to bind. We find that wage rigidity not only reduces the frequency of zero bound episodes but also mitigates the severity of corresponding recessions. As a result, previous studies abstracting from the presence of wage rigidity may have overemphasized the need for increasing the inflation target to offset the costs associated with hitting the zero bound. Moreover, our findings add to the recent debate on the presumed benefits of wage flexibility that has arisen in the aftermath of the Great Recession"--Abstract, p. ii.

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Department/Agency Bank of Canada.
Title Downward nominal wage rigidity meets the zero lower bound
Series Title Bank of Canada staff working paper,
Publication Type Series - View Master Record
Language [English]
Format Electronic
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Note "April 2017." "This paper has been previously circulated with the title “2 + 2 < 4? Monetary Policy in the Presence of Downward Nominal Wage Rigidity and the Zero Lower Bound of the Nominal Interest Rate""-Acknowledgements, p. i.
Date 2017.
Number of Pages ii, 41 p. :
Catalogue Number
  • FB3-5/2017-16E-PDF
Subject Terms Monetary policy, Inflation, Labour market