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Optimal contracts and supply-driven recessions

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  • Candian, Giacomo
  • Dmitriev, Mikhail

Abstract

In models with financial frictions, state-contingent contracts stabilize the business cycle relative to contracts with predetermined repayments. We show that this finding depends on whether predetermined repayments are set in real or nominal terms. State-contingent contracts may amplify supply-driven recessions compared to contracts set in nominal terms.

Suggested Citation

  • Candian, Giacomo & Dmitriev, Mikhail, 2020. "Optimal contracts and supply-driven recessions," Economics Letters, Elsevier, vol. 197(C).
    • Handle: RePEc:eee:ecolet:v:197:y:2020:i:c:s0165176520303785
    DOI: 10.1016/j.econlet.2020.109618
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    References listed on IDEAS

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    1. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
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    More about this item

    Keywords

    Collateral constraints; Financial accelerator; Financial frictions; Optimal contracts;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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