Citation

Discussion Paper Details

Please find the details for DP10330 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Limited Nominal Indexation of Optimal Financial Contracts

Author(s): Césaire A. Meh, Vincenzo Quadrini and Yasuo Terajima

Publication Date: January 2015

Keyword(s): Inflation uncertainty, Nominal indexation and Optimal contracts

Programme Area(s): International Macroeconomics

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10330

Bibliographic Reference

Meh, C, Quadrini, V and Terajima, Y. 2015. 'Limited Nominal Indexation of Optimal Financial Contracts'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10330