Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule

  title={Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule},
  author={Stanley Fischer},
  journal={Journal of Political Economy},
  pages={191 - 205}
  • S. Fischer
  • Published 1 February 1977
  • Economics
  • Journal of Political Economy
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… 

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