Working Paper: CEPR ID: DP1666
Authors: Patrick Minford; Eric Nowell
Abstract: We look for a theoretical justification of nominal wage contracts in household diversification of risk. We assume it is more costly for households than for firms to use financial markets for this purpose. In a calibrated general equilibrium model we find from stochastic simulation that where nominal shocks have comparable variability to real shocks optimal wage contracts are overwhelmingly nominal, in accordance with general OECD experience.
Keywords: nominal contracts; indexing; diversification; stochastic simulation; general equilibrium
JEL Codes: 020; 023
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nominal shocks (E39) | preference for nominal contracts (D86) |
| transaction costs in financial markets (G19) | preference for nominal contracts (D86) |
| variability of nominal shocks > variability of real shocks (E19) | preference for nominal contracts (D86) |
| high nominal variability (E39) | dominance of nominal contracts (K12) |
| economic conditions modeled (E19) | dominance of nominal contracts (K12) |
| income shocks (J65) | preference for nominal contracts (D86) |