Sarah Flèche : sarah.fleche[at]univ-amu.fr
Agnès Tomini : agnes.tomini[at]univ-amu.fr
We investigate the possibility to reflate an economy experiencing a longlasting ZLB episode with subdued or negative inflation, by imposing a minimum level of wage inflation. Our proposed income policy relies on the same mechanism behind past disinflationary policies, but it works in the opposite direction. It is formalized in terms of a downward nominal wage rigidity (DNWR) such that wage inflation cannot be lower than a fraction of the intended inflation target. This specification of the DNWR allows to dissolve the ZLB steady state equilibrium in an OLG model featuring “secular stagnation” and in a infinite-life representative agent model, where this equilibrium can emerge due to deflationary expectations. It always exists a level of the inflation target, and so a minimum wage inflation, that eradicates the ZLB. Our analysis suggests an alternative supply-side policy solution to Japan, which has not managed to raise low inflationary expectations, despite large expansionary fiscal and monetary policies.