Optimal Discretionary Monetary Policy under Downward Nominal Wage Rigidity
نویسندگان
چکیده
We study the implications for optimal monetary policy when declining nominal wages is not a viable margin for adjustment to adverse economic conditions. To this end, we develop a New Keynesian model where downward nominal wage rigidity arises endogenously. We show that the optimal policy response to changing economic conditions is asymmetric. Another important finding is that downward nominal rigidity actually increases welfare. The reason is that downward nominal rigidity is a constraint that changes the choice set, which opens up for a more effective stabilization in terms of welfare losses. Thus, downward nominal rigidity is not just an additional constraint on the policy makers problem.
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