Review of Economic Studies Vol. 55 No. 3 1988

Money and Contracts

Roger E. A. Farmer^1,2

¹ University of California, Los Angeles · ² California University of Pennsylvania

Abstract

This paper presents a novel interpretation of the fact that high nominal interest rates accompany low levels of real GNP. It constructs a model in which money and bonds are both held as a result of legal restrictions on the banking system. Open market operations may increase the equilibrium rate of interest and raise the cost of credit. This increase in the cost of credit causes firms to write labour contracts in which layoffs occur more frequently. The nature of optimal labour contracts is derived explicitly from assumptions about the information that is available to firms and to workers.

DOI

10.2307/2297393

Volume

55

Issue

3

Pages

431

Sources

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