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Nominal Contracting and Monetary Targets -- Drifting into Indexation

  • Patrick Minford

    (Cardiff University and CEPR)

  • Eric Nowell

    (University of Liverpool)

  • Bruce Webb

    (Cardiff University)

We look for a theoretical justification of nominal wage contracts in household diversification of risk. In a calibrated general equilibrium model we find from stochastic simulation that if both productivity and monetary shocks are temporary then optimal wage contracts are overwhelmingly nominal. The model suggests that the persistence in monetary shocks not only raises wage protection but also reduces welfare in a world where productivity shocks are persistent, as both theory and our empirical results for the OCED suggest they are. This suggests that this central bank practice is due for review. Copyright Royal Economic Society 2003.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 113 (2003)
Issue (Month): 484 (January)
Pages: 65-100

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Handle: RePEc:ecj:econjl:v:113:y:2003:i:484:p:65-100
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