(Dis)Solving the Zero Lower Bound Equilibrium through Income Policy

We investigate the possibility to reflate an economy experiencing a long-lasting zero lower bound episode with subdued or negative inflation by imposing a minimum level of wage inflation. The income policy under investigation is formalized as a downward nominal wage growth rigidity, such that wage inflation cannot be lower than a fraction of the inflation target. This policy allows dissolving the zero lower bound steady-state equilibrium in an Overlapping Generations (OLG) model featuring “secular stagnation” and in an infinite-life model, where this equilibrium emerges due to deflationary expectations.