COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 727

"Expansionary Government Policy in an Economy
with Commodity and Labor Contracts"

Russel1 Cooper

October 1984

This paper considers a model in which all exchange is mediated by contracts. The analysis explores the indexation of labor and commodities contracts to observable variations in government spending financed by money creation. In one of the many equilibria, prices and nominal wages are shown to be independent of current money shocks. Except in the extreme equilibrium exhibiting full indexation, policy shocks will generate correlated movements in output and employment over time. The analysis thus suggests an inverse relationship between indexation of contracts and persistence of policy effects.

JEL Classification: 311

Keywords: Labor contracts, money shocks