This paper characterizes labor contracts in a dynamic economy subject to both real and nominal shocks. In this environment, we compare alternative means of trading labor services: spot markets, fixed nominal wage contracts, and price-contingent contracts. The welfare ordering of these market structures is shown to depend on the relative variability of the real and nominal shocks and the costs of contingent contracts. The paper also investigates the role of monetary policy and the neutrality of feedback rules. Finally, we demonstrate that the optimal policy is nonstochastic.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics