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It is well known in the literature that there is a tension between the frequency and duration of the zero lower bound (ZLB) on the nominal interest rate and the determinacy of equilibrium. In this short paper, I show that the presence of downward nominal wage rigidity (DNWR) resolves the tension by preventing a vicious cycle of price declines and output contractions under the ZLB. Consequently, the model with DNWR can replicate the long‐lived ZLB episodes observed in the data. It also implies a plausible size of output and inflation declines at the ZLB.

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In this paper, I develop a New Keynesian model that embeds heterogeneous workers with asymmetric wage adjustment costs to address two inflation puzzles: missing deflation during the Great Recession and the subsequent missing inflation. When the wage adjustment costs are estimated according to U.S. microwage data, downward nominal wage rigidity emerges, which flattens the observed price Phillips curve during and after recessions. Endogenous evolution of the cross‐sectional wage distribution generates nonlinear dynamics including the sign, size, and state dependence. These nonlinearities enable the model to address the inflation puzzles as well as matching microevidence on wage adjustments.