The Welfare Costs of Nominal Wage Contracting

Jang-Ok Cho, Thomas Cooley and Louis Phaneuf

No 30, Cahiers de recherche CREFE / CREFE Working Papers from CREFE, Université du Québec à Montréal

Abstract: We use a dynamic general equilibrium model to obtain quantitative estimates of the welfare costs of nominal wage contracts. We find that the welfare costs of such contracts can vary quite a bit depending on the degree of indexation, the size and persistence of money supply uncertainty and the contract length. However, the size and persistence of the technology shocks do not affect the welfare costs very much. The welfare costs of nominal wage contracting depend also on the elasticity of labor supply. If the elasticity of labor supply is small, the welfare costs can be substantial. We also study how contract length might respond to changes in the environment. The results show that contract length may not be very sensitive to the size and the persistence of real and nominal shocks.

Keywords: business cycles; nominal wage contracts; indexation (search for similar items in EconPapers)
JEL-codes: E32 (search for similar items in EconPapers)
Pages: 19 pages
Date: 1994-06, Revised 1996-01-22
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Citations: View citations in EconPapers (23)

Forthcoming in Review of Economic Studies

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Journal Article: The Welfare Cost of Nominal Wage Contracting (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:cre:crefwp:30

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