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At the individual and country level nominal wages have been found to be downwardly rigid, such that they are more likely to increase than decrease. This has strong implications for optimal monetary policy in the standard New-Keynesian model, which typically assumes flexible wages or symmetric nominal wage rigidities. When wages are downwardly rigid and households do not fully internalise the constraint, boom-bust cycles can arise due to agents increasing their wage flexibly and the economy then suffers as wages sluggishly fall and remain elevated even after the shock dissipates. Solving a non-linear model that internalises this constraint endogenously at all periods in time dampens wage increases in a model where agents can flexibly increase their wage. This work adds to the literature by introducing the downward nominal wage rigidity (DNWR) constraint of Schmitt-Grohé and Uribe (2016) into a standard New-Keynesian model and finding the optimal trend inflation when agents fully understand the existence of this DNWR constraint. Furthermore, motivated by the welfare loss generated by using a standard Taylor rule, this paper searches for a new optimal simple rule that can replicate the optimal monetary policy in this framework. Moreover, as with other work on DNWR this paper finds support for ‘greasing the wheels' - positive trend inflation that helps to deflate real wage increases - at 0.75% to 1%.
