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Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule
Journal of Political Economy
Vol. 85, No. 1 (Feb., 1977), pp. 191-205
Published by: The University of Chicago Press
Stable URL: http://www.jstor.org/stable/1828335
Page Count: 15
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The paper is concerned with the role of monetary policy and argues that activist monetary policy can affect the behavior of real output, rational expectations notwithstanding. A rational expectations model with overlapping labor contracts is constructed, with each labor contract being made for two periods. These contracts inject an element of short-run wage stickiness into the model. Because the money stock is changed by the monetary authority more frequently than labor contracts are renegotiated, and, given the assumed form of the labor contracts, monetary policy has the ability to affect the short-run behavior of output, though it has no effects on long-run output behavior.
Journal of Political Economy © 1977 The University of Chicago Press