Working Paper: NBER ID: w1960
Authors: Alan C. Stockman
Abstract: This paper presents a simp1e example in which incomplete asset markets create \nincentives for buyers and sellers to sign contracts that specify a price \nfunction which differs from the spot market equilibrium price function. The \nprice function can exhibit downward stickiness in nominal prices, In the \nsense that a fall in the money supply reduces nominal prices less than \nproportionately and reduces real output. This equilibrium dominates spot \nmarket equilibrium in terms of expected utility.
Keywords: Price Contracts; Monetary Disturbances; Sticky Prices; Economic Fluctuations
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decrease in the money supply (E51) | Smaller than proportional decrease in nominal prices (E31) |
| Decrease in the money supply (E51) | Decrease in real output (E31) |
| Changes in money supply (E51) | Changes in liquidity across households (G59) |
| Changes in liquidity across households (G59) | Consumption and production decisions (E20) |
| Structure of contracts (L14) | Improved welfare outcomes (I39) |
| Redistribution of liquidity (D39) | Consumption choices (D10) |
| Consumption choices (D10) | Aggregate output (E23) |