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Real Effects of Price Stability with Endogenous Nominal Indexation

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Author Info

  • Césaire Meh
  • Vincenzo Quadrini
  • Yaz Terajima

Abstract

We study a model with repeated moral hazard where financial contracts are not fully indexed to inflation because nominal prices are observed with delay as in Jovanovic & Ueda (1997). More constrained firms sign contracts that are less indexed to the nominal price and, as a result, their investment is more sensitive to nominal price shocks. We also find that the overall degree of nominal indexation increases with the uncertainty of the price level. An implication of this is that economies with higher price-level uncertainty are less vulnerable to a price shock of a given magnitude, that is, aggregate investment and output respond to a lesser degree.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 09-16.

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Length: 38 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:bca:bocawp:09-16

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Keywords: Economic models; Monetary policy framework; Financial markets; Transmission of monetary policy;

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Cited by:
  1. Césaire Meh & Kevin Moran, 2008. "The Role of Bank Capital in the Propagation of Shocks," Working Papers 08-36, Bank of Canada.
  2. Hatcher, Michael C., 2011. "Comparing inflation and price-level targeting: A comprehensive review of the literature," Cardiff Economics Working Papers E2011/22, Cardiff University, Cardiff Business School, Economics Section.
  3. Christiano, Lawrence & Rostagno, Massimo & Motto, Roberto, 2010. "Financial factors in economic fluctuations," Working Paper Series 1192, European Central Bank.
  4. Iulian Vasile Popescu, 2012. "Price-Level Targeting – A Viable Alternative To Inflation Targeting?," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 4, pages 809-823, December.

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