Stock-Returns and Inflation in a Principal-Agent Economy

Boyan Jovanovic, Masako Ueda

    Research output: Contribution to journalArticlepeer-review


    We study a monetary system in which final goods sell on spot markets, while labor and dividends sell through contracts. Firms and workers confuse absolute and relative price changes: A positive price-level shock makes sellers think they are producing better goods than they really are. They split this apparent windfall with workers who get a higher real wage. Hence, unexpected inflation shifts real income from firms (the principals) to workers (the agents), and thereby lowers stock-returns. A predictable money-supply rulestrictlyPareto-dominates random money-supply rules.Journal of Economic LiteratureClassification Numbers: E43, E51.

    Original languageEnglish (US)
    Pages (from-to)223-247
    Number of pages25
    JournalJournal of Economic Theory
    Issue number1
    StatePublished - Sep 1998

    ASJC Scopus subject areas

    • Economics and Econometrics


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