Limited Nominal Indexation of Optimal Financial Contracts

Cesaire Meh, Vincenzo Quadrini and Yaz Terajima
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Cesaire Meh: Bank of Canada

No 486, 2019 Meeting Papers from Society for Economic Dynamics

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 nd 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.

Date: 2019
New Economics Papers: this item is included in nep-dge
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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 (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:486

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