Nominal Contracting and Monetary Targets - Drifting into Indexation

36 Pages Posted: 8 Mar 2003

See all articles by Patrick Minford

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Eric Nowell

University of Liverpool Management School (ULMS) - Economics Division

Bruce Webb

Cardiff University Business School

Abstract

We look for a theoretical justification of nominal wage contracts in household diversification of risk. In a calibrated general equilibrium model we find from stochastic simulation that if both productivity and monetary shocks are temporary then optimal wage contracts are overwhelmingly nominal. The model suggests that the persistence in monetary shocks not only raises wage protection but also reduces welfare in a world where productivity shocks are persistent, as both theory and our empirical results for the OCED suggest they are. This suggests that this central bank practice is due for review.

Suggested Citation

Minford, Patrick and Nowell, Eric and Webb, Bruce, Nominal Contracting and Monetary Targets - Drifting into Indexation. The Economic Journal, Vol. 113, pp. 65-100, 2003. Available at SSRN: https://ssrn.com/abstract=376577

Patrick Minford (Contact Author)

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Eric Nowell

University of Liverpool Management School (ULMS) - Economics Division ( email )

Eleanor Rathbone Building
Bedford Street North
Liverpool L69 7ZA
United Kingdom
+44 15 1794 3058 (Phone)
+44 15 1794 3032 (Fax)

Bruce Webb

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 2920 876802 (Phone)

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