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Money and Contracts

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  • Roger E. A. Farmer

Abstract

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 money and bonds are both held as a result of legal restrictions on the banking system. Open market operations may increase the equilibrium rate of interest and raise the cost of credit. This increase in the cost of credit causes firms to write labour contracts in which layoffs occur more frequently. The nature of optimal labour contracts is derived explicitly from assumptions about the information that is available to firms and to workers.

Suggested Citation

  • Roger E. A. Farmer, 1988. "Money and Contracts," Review of Economic Studies, Oxford University Press, vol. 55(3), pages 431-446.
  • Handle: RePEc:oup:restud:v:55:y:1988:i:3:p:431-446.
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    File URL: http://hdl.handle.net/10.2307/2297393
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    Cited by:

    1. den Haan, Wouter J. & Ramey, Garey & Watson, Joel, 2003. "Liquidity flows and fragility of business enterprises," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1215-1241, September.
    2. repec:cdl:ucsdec:99-07r is not listed on IDEAS
    3. Edward J. Green & Soo-Nam Oh, 1991. "Contracts, constraints, and consumption," Staff Report 143, Federal Reserve Bank of Minneapolis.
    4. Haubrich, Joseph G & King, Robert G, 1991. "Sticky Prices, Money, and Business Fluctuations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 243-259, May.
    5. repec:cdl:ucsdec:99-07 is not listed on IDEAS
    6. Marvin J. Barth III & Valerie A. Ramey, 2002. "The Cost Channel of Monetary Transmission," NBER Chapters,in: NBER Macroeconomics Annual 2001, Volume 16, pages 199-256 National Bureau of Economic Research, Inc.
    7. Asea, Patrick K. & Blomberg, Brock, 1998. "Lending cycles," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 89-128.
    8. Frédérique Bec & Jean-Olivier Hairault, 1993. "Taux d'intérêt, politique monétaire et activité économique en France : un examen empirique," Économie et Prévision, Programme National Persée, vol. 109(3), pages 13-24.

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