Working Paper: NBER ID: w1216
Authors: Robert G. King; Joseph G. Haubrich
Abstract: 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.
Keywords: sticky prices; money neutrality; business fluctuations; contracts
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Nominal contracts (D86) | Price stickiness (E31) |
| Price stickiness (E31) | Non-neutrality of money (E49) |
| Money supply (E51) | Price adjustments (L11) |
| Money growth (O42) | Economic output (E23) |
| Endogenous contracts (D86) | Price adjustments (L11) |
| Endogenous contracts (D86) | Non-neutrality of money (E49) |
| Absence of contracts (D86) | Money neutrality (E19) |