The link between output and contracts under hyperinflation

Carol Dole, David Denslow and Mark Rush

Atlantic Economic Journal, 2000, vol. 28, issue 2, 140-149

Abstract: In the conventional Keynesian model, nominal wage contracts (acting as a friction) transmit monetary shocks to real variables. In contrast, the new classical or real business cycle theory claims that firms and workers ignore the behavior of the actual real wage and instead generate an efficient level of employment (hence, output) based on a shadow real wage. Using Brazilian data covering a period during which the economy suffered hyperinflation and wage contracts were indexed by the government, results show that these fixed nominal wage contracts did not generate a nonneutrality of money as proposed by the Keynesian model. Instead, results support the view that contracts cannot propagate nominal shocks. Copyright International Atlantic Economic Society 2000

Date: 2000
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DOI: 10.1007/BF02298357

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