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The Welfare Cost of Nominal Wage Contracting

Author

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  • Jang-Ok Cho
  • Thomas F. Cooley
  • Louis Phaneuf

Abstract

We use a dynamic general equilibrium model to obtain quantitative estimates of the welfare cost of nominal wage contracting. We find that the welfare cost of such contracts can vary quite a lot depending on the degree of indexation, the size and persistence of monetary shocks and the contract length. The size and persistence of technology shocks do not affect the welfare cost significantly. The elasticity of labour supply is important for the welfare cost. If the labour supply elasticity is small the welfare cost of nominal wage contracts can be substantial.

Suggested Citation

  • Jang-Ok Cho & Thomas F. Cooley & Louis Phaneuf, 1997. "The Welfare Cost of Nominal Wage Contracting," Review of Economic Studies, Oxford University Press, vol. 64(3), pages 465-484.
  • Handle: RePEc:oup:restud:v:64:y:1997:i:3:p:465-484.
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    Cited by:

    1. Huang, Kevin X. D. & Liu, Zheng, 2001. "Production chains and general equilibrium aggregate dynamics," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 437-462, October.
    2. Richard E. Ericson & Xuan Liu, 2012. "Welfare effect of interest rate shocks and policy implications," Applied Financial Economics, Taylor & Francis Journals, vol. 22(22), pages 1899-1917, November.
    3. Moon, Weh-Sol, 2018. "The Business Cycle With Nominal Contracts And Search Frictions," Macroeconomic Dynamics, Cambridge University Press, vol. 22(02), pages 307-330, March.
    4. Hendry, Scott & Zhang, Guang-Jia, 2001. "Liquidity Effects and Market Frictions," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 153-176, April.
    5. Kim, Jinill & Kim, Sunghyun Henry, 2003. "Spurious welfare reversals in international business cycle models," Journal of International Economics, Elsevier, vol. 60(2), pages 471-500, August.
    6. Kevin Huang & Z. Liu, "undated". "Staggered contracts and business cycle persistence," Working Papers 2000-08, Utah State University, Department of Economics.
    7. Andrew T. Levin & Alexei Onatski & John Williams & Noah M. Williams, 2006. "Monetary Policy Under Uncertainty in Micro-Founded Macroeconometric Models," NBER Chapters,in: NBER Macroeconomics Annual 2005, Volume 20, pages 229-312 National Bureau of Economic Research, Inc.
    8. Huang, Kevin X. D. & Liu, Zheng, 2002. "Staggered price-setting, staggered wage-setting, and business cycle persistence," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 405-433, March.
    9. Jang-Ok Cho & Thomas Cooley & Hyung Seok Kim, 2015. "Business Cycle Uncertainty and Economic Welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 185-200, April.
    10. Cho, Jang-Ok & Phaneuf, Louis, 1995. "Monnaie et cycles," L'Actualité Economique, Société Canadienne de Science Economique, vol. 71(2), pages 163-192, juin.
    11. Louis Phaneuf & Nooman Rebei, 2007. "Technology Shocks and Business Cycles: The Role of Processing Stages and Nominal Rigidities," Staff Working Papers 07-7, Bank of Canada.
    12. Alok Johri, 2009. "Delivering Endogenous Inertia in Prices and Output," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 736-754, October.
    13. Moon, Weh-Sol, 2011. "Business cycle with nominal contracts and search frictions," MPRA Paper 31716, University Library of Munich, Germany.
    14. Christopher Heiberger & Alfred Maussner, 2018. "Business Cycle Uncertainty and Economic Welfare Revisited," Discussion Paper Series 335, Universitaet Augsburg, Institute for Economics.
    15. Jean-Pascal Bénassy, 2006. "Dynamic models with non clearing markets," PSE Working Papers halshs-00590433, HAL.
    16. Jinill Kim & Sunghyun Henry Kim, 1999. "Inaccuracy of Loglinear Approximation in Welfare Calculations: the Case of International Risk Sharing," Computing in Economics and Finance 1999 251, Society for Computational Economics.
    17. Bénassy, Jean-Pascal, 2002. "Conférence François-Albert Angers (2002)," L'Actualité Economique, Société Canadienne de Science Economique, vol. 78(4), pages 423-457, Décembre.
    18. Zuzana Janko, 2008. "Nominal Wage Contracts, Labor Adjustment Costs and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 434-448, April.
    19. Choi, Woon Gyu & Cook, David, 2004. "Liability dollarization and the bank balance sheet channel," Journal of International Economics, Elsevier, vol. 64(2), pages 247-275, December.
    20. Jean-Pascal Bénassy, 2006. "Dynamic models with non clearing markets," Working Papers halshs-00590433, HAL.
    21. Alok Johri, 2005. "Learning-by-doing and Endogenous Price-level Inertia," Department of Economics Working Papers 2005-02, McMaster University.
    22. Patrick Minford & Eric Nowell & Bruce Webb, 2003. "Nominal Contracting and Monetary Targets -- Drifting into Indexation," Economic Journal, Royal Economic Society, vol. 113(484), pages 65-100, January.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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