Stock-Returns and Inflation in a Principal-Agent Economy

Boyan Jovanovic; Masako Ueda

doi:10.1006/jeth.1998.2434

Stock-Returns and Inflation in a Principal-Agent Economy

Boyan Jovanovic^*, Masako Ueda

^*Corresponding author for this work

Economics

Research output: Contribution to journal › Article › peer-review

6 Scopus citations

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)
Pages (from-to)	223-247
Number of pages	25
Journal	Journal of Economic Theory
Volume	82
Issue number	1
DOIs	https://doi.org/10.1006/jeth.1998.2434
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

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10.1006/jeth.1998.2434

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author = "Boyan Jovanovic and Masako Ueda",

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AB - 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.

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Stock-Returns and Inflation in a Principal-Agent Economy

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