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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

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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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File URL: http://www.bankofcanada.ca/en/res/wp/2009/wp09-16.pdf
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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
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Handle: RePEc:bca:bocawp:09-16

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

Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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This page was last updated on 2009-11-24.

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