The Macroeconomic Implications of Contract Models with Asymmetric Information.

This paper shows that, with the imposition of asymmetric information, monetary shocks can have real effects in a model with optimal employment contracts. Firms are assumed to experience supply shocks that are their own private information. When a bad shock occurs, contractual employment is inefficiently low. Contracts depend upon the probability of a bad state occurring. If the aggregate price level is correlated with the firm's private information, contracts will depend upon prices. It is shown that an unanticipated increase in the money supply increases prices and employment. The authors explore the macroeconomic implications of the model. Copyright 1990 by Ohio State University Press.