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Working Paper

Sticky Prices, Money, and Business Fluctuations

Can nominal contracts create monetary nonneutrality if they arise endogenously in general equilibrium? Yes, if (1) agents have complete information about the money stock and (2) shocks to the system are purely redistributive and private information, precluding conventional insurance markets. Without contracts, money is neutral toward aggregate quantities. However, risk-sharing between suppliers and demanders creates an incentive for both parties to use nominal contracts. 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 money is positively associated with output.

Suggested Citation

Haubrich, Joseph G., and Robert King. 1990. “Sticky Prices, Money, and Business Fluctuations.” Federal Reserve Bank of Cleveland, Working Paper No. 90-08.