Contracts and Money

28 Pages Posted: 4 Aug 2000 Last revised: 29 May 2021

See all articles by Boyan Jovanovic

Boyan Jovanovic

New York University - Department of Economics

Masako Ueda

University of Wisconsin, Madison - School of Business; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: June 1996

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.

Suggested Citation

Jovanovic, Boyan and Ueda, Masako, Contracts and Money (June 1996). NBER Working Paper No. w5637, Available at SSRN: https://ssrn.com/abstract=225559

Boyan Jovanovic (Contact Author)

New York University - Department of Economics ( email )

19 w 4 st.
New York, NY 10012
United States

Masako Ueda

University of Wisconsin, Madison - School of Business ( email )

975 University Avenue
Madison, WI 53706
United States
608-262-3656 (Phone)
608-265-4195 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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