The optimality of nominal contracts

Guido Tabellini and Scott Freeman

Economic Theory, 1998, vol. 11, issue 3, 545-562

Abstract: This paper presents a model in which agents choose to use money as a medium of exchange, a means of payment, and a unit of account. The paper defines conditions under which nominal contracts, promising future payment of a fixed number of units of fiat money, prove to be the optimal contract form in the presence of either relative or aggregate price risk. When relative prices are random, nominal contracts are optimal if individuals have ex ante similar preferences over future consumption. When the aggregate price level is random, whether from shocks to the money supply or aggregate output, nominal contracts (perhaps coupled with equity contracts) lead to optimal risk-sharing if individuals have the same degree of relative risk aversion. Finally, nominal contracts may be optimal if the repayment of contracts is subject to a binding cash-in-advance constraint. In this case, a contingent contract increases the risk of holding excessive cash balances.

JEL-codes: D91 E43 E44 (search for similar items in EconPapers)
Date: 1998-05-05
Note: Received: March 29, 1996; revised version: February 25, 1997
References: Add references at CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://link.springer.de/link/service/journals/00199/papers/8011003/80110545.pdf (application/pdf)
http://link.springer.de/link/service/journals/0019 ... 11003/80110545.ps.gz (application/postscript)
Access to the full text of the articles in this series is restricted

Related works:
Working Paper: The optimality of nominal contracts (1991)
Working Paper: The Optimality of Nominal Contracts (1991)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:11:y:1998:i:3:p:545-562

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().