Optimal contracts and supply-driven recessions

Giacomo Candian and Mikhail Dmitriev

Economics Letters, 2020, vol. 197, issue C

Abstract: In models with financial frictions, state-contingent contracts stabilize the business cycle relative to contracts with predetermined repayments. We show that this finding depends on whether predetermined repayments are set in real or nominal terms. State-contingent contracts may amplify supply-driven recessions compared to contracts set in nominal terms.

Keywords: Collateral constraints; Financial accelerator; Financial frictions; Optimal contracts (search for similar items in EconPapers)
JEL-codes: C68 E44 E61 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Optimal contracts and supply-driven recessions (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:197:y:2020:i:c:s0165176520303785

DOI: 10.1016/j.econlet.2020.109618

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