Economics, Econometrics and Finance
8 years ago

Monetary shocks create price and interest rate cycles, impacting economy.

The North American Journal of Economics and Finance
Price and interest rate dynamics induced by multiperiod contracts
Deborah Lucas

Paper Summary

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The article explains how rigid prices can affect interest rates and prices in an economy with spot and contract markets. When there's a sudden change in the money supply, interest rates and prices go through cycles before settling at a new balance. Real interest rates drop and prices go up too much after a positive shock. Spot prices and interest rates change more than contract prices.