The authors use a dynamic general equilibrium model to obtain quantitative estimates of the welfare cost of nominal wage contracting. They find that the welfare cost of such contracts can vary quite a lot depending on the degree of indexation, the size and persistence of monetary shocks, and the contract length. The size and persistence of technology shocks do not affect the welfare cost significantly. The elasticity of labor supply is important for the welfare cost. If the labor supply elasticity is small, the welfare cost of nominal wage contracts can be substantial. Copyright 1997 by The Review of Economic Studies Limited.