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Stock-Returns and Inflation in a Principal-Agent Economy

  • Jovanovic, Boyan
  • Ueda, Masako

We study a monetary in which final goods sell on spot markets, while labor and dividends sell through contracts. Firms and workers confuse absolute and relative price changes: A positive price-level shock makes sellers think they are producing better goods than they really are. They split this apparent windfall with workers who get a higher real wage. Hence, unexpected inflation shifts real income from firms (the principals) to workers (the agents) and thereby lowers stock-returns.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 82 (1998)
Issue (Month): 1 (September)
Pages: 223-247

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Handle: RePEc:eee:jetheo:v:82:y:1998:i:1:p:223-247
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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