The Welfare Cost of Nominal Wage Contracting

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Abstract
We use a dynamic general equilibrium model to obtain quantitative estimates of the welfare cost of nominal wage contracting. We 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 labour supply is important for the welfare cost. If the labour supply elasticity is small the welfare cost of nominal wage contracts can be substantial.

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