Discussion paper
DP1666 Nominal Contracts as Behaviour Towards Risk
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.
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