Limited Nominal Indexation of Optimal Financial Contracts

Vincenzo Quadrini, Meh, Césaire A. and Yaz Terajima

No 10330, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study a model with repeated moral hazard where financial contracts are not fully indexed to inflation because nominal prices are observed with delay as in Jovanovic and Ueda 1997. More constrained firms sign contracts that are less indexed to inflation and, as a result, their investment is more sensitive to nominal price shocks. We also find that the overall degree of nominal indexation increases with price uncertainty. An implication of this is that economies with higher inflation uncertainty are less vulnerable to a price shock of a given magnitude. The micro predictions of the model are tested empirically using macro and firm-level data from Canada.

Keywords: Inflation uncertainty; Nominal indexation; Optimal contracts (search for similar items in EconPapers)
JEL-codes: E21 E31 E44 E52 (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Limited Nominal Indexation of Optimal Financial Contracts (2024)
Working Paper: Limited Nominal Indexation of Optimal Financial Contracts (2019)
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