Abstract
We study a monetary system in which final goods sell on spot markets, while labor and dividends sell through contracts. Firms and workers confuse absolute and relative price changes: A positive price-level shock makes sellers think they are producing better goods than they really are. They split this apparent windfall with workers who get a higher real wage. Hence, unexpected inflation shifts real income from firms (the principals) to workers (the agents), and thereby lowers stock-returns. A predictable money-supply rulestrictlyPareto-dominates random money-supply rules.Journal of Economic LiteratureClassification Numbers: E43, E51.
Original language | English (US) |
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Pages (from-to) | 223-247 |
Number of pages | 25 |
Journal | Journal of Economic Theory |
Volume | 82 |
Issue number | 1 |
DOIs | |
State | Published - Sep 1998 |
Funding
We thank Yakov Amihud, Will Baumol, Alberto Bisin, and an associate editor for comments, and the NSF and the CV Starr Center at NYU for financial help.
ASJC Scopus subject areas
- Economics and Econometrics