DP1666 Nominal Contracts as Behaviour Towards Risk

Author(s): Patrick Minford, Eric Nowell
Publication Date: August 1997
Keyword(s): General Equilibrium, Indexing Diversification, Nominal Contracts, Stochastic Simulation
JEL(s): O20, O23
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1666

We look for a theoretical justification of nominal wage contracts in household diversification of risk. We assume it is more costly for households than for firms to use financial markets for this purpose. In a calibrated general equilibrium model we find from stochastic simulation that where nominal shocks have comparable variability to real shocks optimal wage contracts are overwhelmingly nominal, in accordance with general OECD experience.