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Contracts and Money

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  • Boyan Jovanovic
  • Masako Ueda

Abstract

We analyze the contractual relation between workers and their employers when there is nominal risk. The key feature of the problem is that the consumption deflator is random and observed sometime after the effort is exerted. The worker's effort is not observable, and to induce the agent to work, second-best contracts do not insure the worker fully. They do eliminate all nominal risk for the parties (by fully indexing the terms of the contracts to the price level) but they would be re-negotiated. Foreseeing this, the parties to the contract will write one that is renegotiation-proof. Under such a contract, nominal shocks affect real consumption. Since the argument should apply in many situations, it will have macroeconomic implications, one of which is short-run non-neutrality of money. We have found that surprise money is likely to redistribute consumption and welfare towards workers, and away from shareholders.

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  • Boyan Jovanovic & Masako Ueda, 1996. "Contracts and Money," NBER Working Papers 5637, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5637
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    Cited by:

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    2. Jones, L.E. & Manuelli, R.E, 1997. "Policy Uncertainty and Informational Monopolies: The Case of Monetary Policy," Working papers 9715, Wisconsin Madison - Social Systems.
    3. Antoine Martin & Cyril Monnet, 2000. "When should labor contracts be nominal?," Working Papers 603, Federal Reserve Bank of Minneapolis.
    4. Young Sik Kim & Manjong Lee, 2011. "Unit of Account, Medium of Exchange, and Prices," Discussion Paper Series 1104, Institute of Economic Research, Korea University.
    5. Yaz Terajima & Vincenzo Quadrini & Cesaire Meh, 2009. "Real Effects of Price Stability with Endogenous Nominal Indexation," 2009 Meeting Papers 847, Society for Economic Dynamics.
    6. Mukerji, Sujoy & Tallon, Jean-Marc, 2004. "Ambiguity aversion and the absence of wage indexation," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 653-670, April.
    7. William (Bill) Zame & Jean-Paul L'Huillier, 2015. "Optimally Sticky Prices," 2015 Meeting Papers 621, Society for Economic Dynamics.
    8. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond.
    9. Hajime Tomura, 2019. "Imperfect Contract Enforcement and Nominal Liabilities," Working Papers 1905, Waseda University, Faculty of Political Science and Economics.
    10. Hajime Tomura, 2021. "Nominal contracts and the payment system," The Japanese Economic Review, Springer, vol. 72(2), pages 185-216, April.
    11. Jovanovic, Boyan & Ueda, Masako, 1998. "Stock-Returns and Inflation in a Principal-Agent Economy," Journal of Economic Theory, Elsevier, vol. 82(1), pages 223-247, September.
    12. L’Huillier, Jean-Paul & Zame, William R., 2022. "Optimally sticky prices: Foundations," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    13. Takuya Nakaizumi, 2016. "Hold-up Problem in Price Cap Regulation with Limited Ability of Commitment in High Inflation," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 55(4), pages 947-953.
    14. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
    15. Patrick Minford & Eric Nowell & Bruce Webb, 2003. "Nominal Contracting and Monetary Targets -- Drifting into Indexation," Economic Journal, Royal Economic Society, vol. 113(484), pages 65-100, January.
    16. Kim, Young Sik & Lee, Manjong, 2017. "Money, unit of account, and nominal rigidity," Economics Letters, Elsevier, vol. 160(C), pages 59-63.

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    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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