Lunch Seminar: Roberto Robatto - Wisconsin School of Business
2015-07-13 13:00 - 14:00 UTC
A Theory of Non-Contingent Nominal Deposit Contracts
Abstract:
Why are deposit contracts nominal and non-contingent on the aggregate price level? To answer this question, I present an extension of the Diamond-Dybvig model with informational frictions that prevent the aggregate state and the price level from being fully observed, and in which money is required for transactions. The optimal contract is nominal and non-contingent and the decentralized equilibrium supports the constrained first-best allocation. Allowing for the possibility of paying a fixed cost to acquire information about the aggregate state, the nominal non-contingent contract is strictly preferred to a contingent contract even if the fixed cost is very small.
