Money and Contracts
This paper presents a novel interpretation of the fact that high nominal interest rates accompany low levels of real GNP. It constructs a model in which mon ey and bonds are both held as a result of legal restrictions on the b anking system. Open market operations may increase the equilibrium ra te of interest and raise the cost of credit. This increase in the cos t of credit causes firms to write labor contracts in which layoffs oc cur more frequently. The nature of optimal labor contracts is derived explicitly from assumptions about the information that is available to firms and to workers. Copyright 1988 by The Review of Economic Studies Limited.
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Volume (Year): 55 (1988)
Issue (Month): 3 (July)
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