Long-term contracts, imperfect information, and monetary policy

Mark L. Gertler

    Research output: Contribution to journalArticlepeer-review

    Abstract

    This paper considers the implications of imperfect information for monetary policy in a model with rational expectations and long-term contracts. The source of uncertainty is the inability of the monetary authority and private agents to directly observe systematic aggregate real and nominal disturbances. Imperfect information introduces the possibility of persistence in the departure of output from the natural level which lasts well beyond the wage setting interval, because the filtering process that agents use to estimate the disturbances leads to serially correlated errors in the wage setting process. It also implies that a monetary feedback rule can affect output only if it is tied to unexpected movements in the information variables. The policy issue posed is related to Friedman's original defense of the constant money growth rule, which emphasized uncertainty about the system rather than the neutrality of systematic monetary rules.

    Original languageEnglish (US)
    Pages (from-to)197-216
    Number of pages20
    JournalJournal of Economic Dynamics and Control
    Volume3
    Issue numberC
    DOIs
    StatePublished - Nov 1981

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Control and Optimization
    • Applied Mathematics

    Fingerprint Dive into the research topics of 'Long-term contracts, imperfect information, and monetary policy'. Together they form a unique fingerprint.

    Cite this