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Author: Nils Gottfries
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Author: Nils Gottfries
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Author: Scott Freeman
Publisher:
ISBN:
Category : Contracts
Languages : en
Pages : 44
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Why do we see nominal contracts in the presence of price level risk? To answer this question, this paper studies an overlapping generations model in which the equilibrium contract form is optimal, given the contracts elsewhere in the economy. Nominal contracts turn out to be optimal in the presence of aggregate price level risk under two circumstances. First, if individuals have the same constant degree of relative risk aversion. The reason is that in this case nominal contracts (eventually coupled with equity contracts) lead to optimal risk sharing. Second, nominal contracts can be optimal, even if the first condition is not met, if the repayment of contracts is subject to a binding cash in advance constraint. The reason is that a contingent contract, while reducing purchasing power risk, also increases the cash flow risk. Under a binding cash in advance constraint on the repayment of contracts, this second risk is costly, and it is minimized by a nominal contract. Finally, the paper also identifies some symmetry conditions under which nominal contracts are optimal even in the presence of relative price risk.
Author: Scott Freeman
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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This paper presents a model in which agents choose to use money as a medium of exchange, a means of payment, and a unit of account. The paper defines conditions under which nominal contracts, promising future payment of a fixed number of units of fiat money, prove to be the optimal contract form in the presence of either relative or aggregate price risk. When relative prices are random, nominal contracts are optimal if individuals have ex ante similar preferences over future consumption. When the aggregate price level is random, whether from shocks to the money supply or aggregate output, nominal contracts (perhaps coupled with equity contracts) lead to optimal risk-sharing if individuals have the same degree of relative risk aversion. Finally, nominal contracts may be optimal if the repayment of contracts is subject to a binding cash-in-advance constraint. In this case, a contingent contract increases the risk of holding excessive cash balances.
Author: Cho, Jang-Ok
Publisher: Kingston, Ont. : Institute for Economic Research, Queen's University
ISBN:
Category :
Languages : en
Pages : 49
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Author: Daron Acemoglu
Publisher:
ISBN:
Category : Contracts
Languages : en
Pages : 32
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Author: Queen's University. Institute for Economic Research
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Nils Gottfries
Publisher:
ISBN:
Category :
Languages : en
Pages : 36
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Author: Antoine Martin
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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We propose a theory to explain the choice between nominal and indexed labor contracts. We find that contracts should be indexed if prices are difficult to forecast and nominal otherwise. Our analysis is based on a principal-agent model developed by Jovanovic and Ueda (1997) in which renegotiation can take place once the nominal value of the agent's output is observed. Their model assumes that agents use pure strategy, with the strong result that only nominal contracts can be written without being renegotiated. But, in reality, we do observe indexed contracts. We resolve this weakness of their model by allowing agents to choose mixed strategies, and find that the optimal contract is indeed nominal for certain parameters. For other parameters, however, we show that the optimal contract is indexed. Our findings are consistent with two empirical regularities: that prices are more volatile with higher inflation, and that countries with high inflation tend to have indexed contracts.
Author: Jang-Ok Cho
Publisher:
ISBN:
Category : Business cycles
Languages : en
Pages : 58
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Author: Jang-Ok Cho
Publisher:
ISBN:
Category :
Languages : en
Pages : 28
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