Unanticipated inflation or deflation causes one party of a nominal contract to gain at the expense of the other party, an effect absent in macroeconomic models with one representative consumer or with consumers having identical consumption. In this paper's general dynamic and stochastic equilibrium model, diverse consumers maximize risk-averse utility and rent labor and land to profit-maximizing firms. Both inflation indexing and strict inflation targeting are Pareto inefficient. When Pareto sharing of changes of aggregate supply is proportional, nominal contracts under perfect nominal income targeting are Pareto efficient, while quasi-real contracts are Pareto efficient regardless.
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Paper provided by EconWPA in its series Macroeconomics with number
0312010.
Length: 41 pages Date of creation: 29 Dec 2003 Date of revision: Handle: RePEc:wpa:wuwpma:0312010
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Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
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