George A. Akerlof, William T. Dickens, and George L. Perry examine the macroeconomic implications of low inflation, challenging the traditional natural rate model. They argue that the natural rate of unemployment is not unique and that steady inflation is consistent with a certain unemployment rate, which depends on the inflation rate. In the long run, moderate inflation allows maximum employment and output, while zero inflation increases sustainable unemployment and reduces output. Their analysis shows that zero inflation imposes permanent real costs on the economy, contradicting the premise of the Economic Growth and Price Stability Act of 1995. The authors highlight the importance of downward nominal wage rigidity, which is often overlooked in macroeconomic models. They present evidence showing that nominal wage cuts are rare, except during extreme financial strain. Ethnographic studies, such as those by Bewley and Brainard, reveal that firms are reluctant to cut wages due to concerns about morale and fairness. Additionally, surveys and data on wage changes in manufacturing, union settlements, and Canadian data support the existence of wage rigidity. The authors also analyze recent panel data studies, which suggest frequent wage cuts, but argue that these findings are spurious due to reporting errors. They develop a formal model that incorporates downward wage rigidity and show that it leads to significant employment and output losses under low inflation policies. The model demonstrates that wage constraints act like a real cost shock, affecting prices and wages. The authors compare general-equilibrium and partial-equilibrium analyses, finding that the former produces different estimates of the consequences of targeting zero inflation. They also develop a stochastic simulation calibrated to U.S. data, showing that the sustainable unemployment rate increases as inflation approaches zero. The simulation also tracks price changes during the Great Depression, which conventional models struggle to explain. The authors conclude that downward nominal wage rigidity is a key factor in wage behavior, and that the results of the simulation and other studies strongly support the existence of wage rigidity. They argue that the natural rate model is flawed and that the implications of zero inflation are not as beneficial as claimed. The analysis highlights the importance of considering wage rigidity in macroeconomic models and the need for more accurate data to understand its effects.George A. Akerlof, William T. Dickens, and George L. Perry examine the macroeconomic implications of low inflation, challenging the traditional natural rate model. They argue that the natural rate of unemployment is not unique and that steady inflation is consistent with a certain unemployment rate, which depends on the inflation rate. In the long run, moderate inflation allows maximum employment and output, while zero inflation increases sustainable unemployment and reduces output. Their analysis shows that zero inflation imposes permanent real costs on the economy, contradicting the premise of the Economic Growth and Price Stability Act of 1995. The authors highlight the importance of downward nominal wage rigidity, which is often overlooked in macroeconomic models. They present evidence showing that nominal wage cuts are rare, except during extreme financial strain. Ethnographic studies, such as those by Bewley and Brainard, reveal that firms are reluctant to cut wages due to concerns about morale and fairness. Additionally, surveys and data on wage changes in manufacturing, union settlements, and Canadian data support the existence of wage rigidity. The authors also analyze recent panel data studies, which suggest frequent wage cuts, but argue that these findings are spurious due to reporting errors. They develop a formal model that incorporates downward wage rigidity and show that it leads to significant employment and output losses under low inflation policies. The model demonstrates that wage constraints act like a real cost shock, affecting prices and wages. The authors compare general-equilibrium and partial-equilibrium analyses, finding that the former produces different estimates of the consequences of targeting zero inflation. They also develop a stochastic simulation calibrated to U.S. data, showing that the sustainable unemployment rate increases as inflation approaches zero. The simulation also tracks price changes during the Great Depression, which conventional models struggle to explain. The authors conclude that downward nominal wage rigidity is a key factor in wage behavior, and that the results of the simulation and other studies strongly support the existence of wage rigidity. They argue that the natural rate model is flawed and that the implications of zero inflation are not as beneficial as claimed. The analysis highlights the importance of considering wage rigidity in macroeconomic models and the need for more accurate data to understand its effects.