Endogenous contract structure and monetary policy

Avner Bar-Ilan, Daniel J. Seidmann

Research output: Contribution to journalArticlepeer-review


We analyze the co-determination of monetary policy and the labor contracts chosen by members of the public, who can either fix or index their nominal wages. Fixed nominal wages allow the central bank to offset productivity shocks, while the public fix nominal wages in response to the central bank offsetting shocks; so there is an equilibrium in which, realistically, nominal wages are fixed and shocks offset: a result which holds in single- as well as in multi-period games. In addition, there may be equilibria in which agents index their nominal wages, and the central bank optimally responds by stabilizing price. In contrast to conventional models, the Ramsey rule may be implemented in a finitely repeated game. The central bank does not deviate for fear that agents would change their labor contracts such that the central bank's least favored equilibrium will subsequently be played.

Original languageEnglish
Pages (from-to)1043-1060
Number of pages18
JournalEuropean Economic Review
Issue number4
StatePublished - May 2006


  • Monetary policy
  • Rules vs. discretion
  • Wage indexation

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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