Price Contracts, Output, and Monetary Disturbances

This paper presents a simp1e example in which incomplete asset markets create incentives for buyers and sellers to sign contracts that specify a price function which differs from the spot market equilibrium price function. The price function can exhibit downward stickiness in nominal prices, In the sense that a fall in the money supply reduces nominal prices less than proportionately and reduces real output. This equilibrium dominates spot market equilibrium in terms of expected utility.