Sticky Prices, Money and Business Fluctuations

Robert King () and Joseph Haubrich

No 1216, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Can nominal contracts make a difference for the neutrality of money if these arise endogenously in general equilibrium? This paper utilizes aversion of Lucas's seminal equilibrium business cycle theory to address this question. However, we depart from Lucas in assuming that (1) agents have complete information about the money stock; (ii) fundamental shocks to the system are purely redistributive and private information; and (iii) moral hazard precludes conventional insurance markets.With an exogenous restriction on contracts, money is fully neutral. But, when this restrictionis lifted, efficient risk-sharing between suppliers and demanders leads to a potential nonneutralitv of money. In particular, if an increase in the money growth rate signals a rise in the dispersion of shocks to demanders' wealth,then prices adjust only partially to monetary shocks and there is a positive association between money and output.

Date: 1983-10
Note: EFG
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Published as Journal of Money, Credit and Banking, Vol. 23, no. 2 (1991): 243-259.

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Journal Article: Sticky Prices, Money, and Business Fluctuations (1991)
Working Paper: Sticky prices, money, and business fluctuations (1990)
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