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Real Effects of Price Stability with Endogenous Nominal Indexation

  • Césaire Meh
  • Vincenzo Quadrini
  • Yaz Terajima

We study a model with repeated moral hazard where financial contracts are not fully indexed to inflation because nominal prices are observed with delay as in Jovanovic & Ueda (1997). More constrained firms sign contracts that are less indexed to the nominal price and, as a result, their investment is more sensitive to nominal price shocks. We also find that the overall degree of nominal indexation increases with the uncertainty of the price level. An implication of this is that economies with higher price-level uncertainty are less vulnerable to a price shock of a given magnitude, that is, aggregate investment and output respond to a lesser degree.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp09-16.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 09-16.

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Length: 38 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:bca:bocawp:09-16
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  1. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
  2. Jovanic, Boyan & Ueda, Masako, 1997. "Contracts and Money," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 700-708, August.
  3. Quadrini, Vincenzo, 2004. "Investment and liquidation in renegotiation-proof contracts with moral hazard," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 713-751, May.
  4. Martin Antoine & Monnet Cyril, 2006. "Contracts and Money Revisited," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-15, January.
  5. Wang, Cheng, 2000. "Renegotiation-Proof Dynamic Contracts with Private Information," Staff General Research Papers 5248, Iowa State University, Department of Economics.
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