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Limited Nominal Indexation of Optimal Financial Contracts

Author

Listed:
  • Cesaire Meh

    (Bank of Canada)

  • Vincenzo Quadrini

    (USC)

  • Yaz Terajima

    (Bank of Canada)

Abstract
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 and Ueda (1997). More constrained firms sign contracts that are less indexed to inflation and, as a result, their investment is more sensitive to nominal price shocks. We also nd that the overall degree of nominal indexation increases with price uncertainty. An implication of this is that economies with higher inflation uncertainty are less vulnerable to a price shock of a given magnitude.

Suggested Citation

  • Cesaire Meh & Vincenzo Quadrini & Yaz Terajima, 2019. "Limited Nominal Indexation of Optimal Financial Contracts," 2019 Meeting Papers 486, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:486
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    References listed on IDEAS

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    Cited by:

    1. Cheng Wang, 2000. "Renegotiation-Proof Dynamic Contracts with Private Information," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 396-422, July.

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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