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Sticky Prices, Money and Business Fluctuations

  • Robert G. King
  • Joseph G. Haubrich

Can nominal contracts make a difference for the neutrality of money if these arise endogenously in general equilibrium? This paper utilizes aversion of Lucas's seminal equilibrium business cycle theory to address this question. However, we depart from Lucas in assuming that (1) agents have complete information about the money stock; (ii) fundamental shocks to the system are purely redistributive and private information; and (iii) moral hazard precludes conventional insurance markets.With an exogenous restriction on contracts, money is fully neutral. But, when this restrictionis lifted, efficient risk-sharing between suppliers and demanders leads to a potential nonneutralitv of money. In particular, if an increase in the money growth rate signals a rise in the dispersion of shocks to demanders' wealth,then prices adjust only partially to monetary shocks and there is a positive association between money and output.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1216.

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Date of creation: Oct 1983
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Publication status: published as Journal of Money, Credit and Banking, Vol. 23, no. 2 (1991): 243-259.
Handle: RePEc:nbr:nberwo:1216
Note: EFG
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  1. Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
  2. Farmer, Roger E A, 1988. "Money and Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(3), pages 431-46, July.
  3. Cooper, Russell, 1988. "Labor contracts and the role of monetary policy in an overlapping generations model," Journal of Economic Theory, Elsevier, vol. 44(2), pages 231-250, April.
  4. Bennett T. McCallum, 1982. "Macroeconomics after a decade of rational expectations : some critical issues," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 3-12.
  5. Maskin, Eric S. & Grossman, Sanford J. & Hart, Oliver D., 1983. "Unemployment with Observable Aggregate Shocks," Scholarly Articles 3448840, Harvard University Department of Economics.
  6. Robert J. Gordon, 1981. "Output Fluctuations and Gradual Price Adjustment," NBER Working Papers 0621, National Bureau of Economic Research, Inc.
  7. Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 1-18, January.
  8. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  9. Robert G. King & Bharat Trehan, 1983. "The Implications of an Endogenous Money Supply for Monetary Neutrality," NBER Working Papers 1175, National Bureau of Economic Research, Inc.
  10. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  11. Azariadis, Costas, 1978. "Escalator clauses and the allocation of cyclical risks," Journal of Economic Theory, Elsevier, vol. 18(1), pages 119-155, June.
  12. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
  13. Smith, Bruce D, 1989. "A Model of Nominal Contracts," Journal of Labor Economics, University of Chicago Press, vol. 7(4), pages 392-414, October.
  14. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 353-60, July.
  15. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  16. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  17. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  18. Parkin, Michael, 1986. "The Output-Inflation Trade-off When Prices Are Costly to Change," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 200-224, February.
  19. Roger Gordon, 2006. "Editor, Journal of Economic Literature," American Economic Review, American Economic Association, vol. 96(2), pages 510-511, May.
  20. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
  21. Rogerson, Richard & Wright, Randall, 1988. "Involuntary unemployment in economies with efficient risk sharing," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 501-515.
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