Labor contracts and monetary policy

Fischer and others have shown that the very existence of long-term contracts can imply a stabilization role for monetary policy in models that incorporate the natural rate hypothesis and rational expectation formation. The present paper examines some of the factors that determine the length of labor contracts and how they are affected by monetary policy. It is argued that a successful stabilization policy might be expected to increase the length of contracts. The net effect of the imposition of such a policy would therefore be to dampen the amplitude of business cycles, but to make them more inertia ridden.