COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Post Office Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 656R

"Optimal Labor Contracts and the Role of Monetary Policy
in an Overlapping Generations Model"

Russell Cooper

December 1982

This paper extends the optimal labor contracts literature to consider an environment with both real and nominal shocks. In an overlapping generations model, we compare alternative means of trading labor services: spot markets, fixed nominal wage contracts and price-contingent contracts. The ordering of these market structures will depend on the relative variability of the real and nominal shocks and the costs of contingent contracts. We also investigate the role of monetary policy and the circumstances under which feedback rules are neutral. Finally, we show that a non-stochastic monetary policy is optimal.